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FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management

A bank's board of directors is reviewing its responsibilities under supervisory guidance on model risk management (SR 11-7 style). Which of the following is most consistent with the board's role?

The board's role is to approve the model risk management framework and ensure it receives and reviews regular reports on model risk. Technical tasks such as validation, documentation and choosing estimation methods belong to management and staff, not directors.

  1. AApproving the model risk management framework and ensuring senior management reports on model risk are reviewed periodicallyCorrect
  2. BPerforming the independent validation of each material model personally
  3. CWriting the technical documentation for every model in use
  4. DSelecting the statistical estimation method for each model

Explanation

The guidance places responsibility for establishing the tone, setting the risk appetite and ensuring a sound framework with the board, and requires regular reporting on model risk. Validation, documentation and technical choices are carried out by staff and management, not by the board.

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