FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
A bank's capital planning relies on loss estimates from a vendor model. Management documents that the model was validated, but the validation did not assess the model's assumptions in a stressed environment, data quality was not tested, and no limitations were reported to senior management. Which action best remediates the control framework?
The best remediation is validation that covers conceptual soundness, data integrity and performance under stress, with limitations and any compensating adjustments reported to senior management and the board. Vendor reputation does not replace validation, and undocumented judgment or point estimates alone hide model uncertainty from governance.
- AAccept the model because the vendor is reputable
- BRequire validation covering conceptual soundness, data integrity and stressed-condition performance, with limitations and compensating adjustments reported to senior management and the boardCorrect
- CReplace the model with expert judgment without documentation
- DReport only the point estimate to the board to avoid confusion
Explanation
Effective controls require validation of conceptual soundness, data inputs and performance under stress, even for vendor models. Known limitations must be communicated with any compensating adjustments so governance bodies can challenge results. Reputation alone, undocumented judgment, or reporting only point estimates leave key uncertainty unreported.
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