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FRM Part II · FRM Exam Part II · Case Study: Model Risk and Model Validation

A bank's board is reviewing model risk governance. Which allocation of responsibilities is most consistent with SR 11-7?

The board approves the model risk management policy and reviews reports on model risk, while senior management implements the policy and ensures resources and independence for validation. The board does not set model parameters, and users or audit should not replace independent validation.

  1. AThe board approves the model risk policy and reviews reports on model risk; senior management implements the policy and ensures validation resourcesCorrect
  2. BThe board approves each model's parameters; validators own the model inventory and approve their own findings
  3. CBusiness users decide independently which models require validation; the board is informed only of failures
  4. DInternal audit performs all validation and owns model development

Explanation

SR 11-7 assigns the board responsibility for setting the model risk appetite and approving the policy, with regular reporting. Senior management executes the policy, ensures adequate resources and organizes validation independence. Boards do not approve parameters, users do not decide validation scope alone, and audit assesses the overall framework rather than doing the validation itself.

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