FRM Part II · FRM Exam Part II · Governance
A bank's credit risk officer finds that relationship managers frequently override the internal rating model's output to improve ratings on large clients, with little documentation. Which governance response is most appropriate?
The bank should permit overrides only within a controlled framework: documented rationale, independent approval above thresholds, monitoring of override frequency and subsequent performance, and reporting to senior management. This preserves useful judgement while limiting conflicts of interest that arise when revenue-focused relationship managers alter ratings.
- AProhibit all overrides permanently, since models are always more accurate than judgement
- BAllow overrides, but require documented rationale, independent approval above defined thresholds, tracking of override rates and performance, and reporting to senior managementCorrect
- CLeave overrides to relationship managers because they know the clients best
- DStop using the model for large clients and rely only on external ratings
Explanation
Overrides can add legitimate information but create conflict of interest when made by the revenue-generating front office. Controls should include documentation, independent approval, monitoring of override frequency and outcomes, and escalation. A total ban ignores valuable judgement, while unfettered overrides undermine rating integrity.
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