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

A bank's credit scoring model was built and tuned by a team of quantitative analysts. Under supervisory guidance on model risk management (SR 11-7), which description best captures 'effective challenge' of that model?

Effective challenge is critical analysis by objective, informed people who can spot model limitations and flawed assumptions and who have the incentives, authority and influence to get problems fixed. Developer self-checks, documentation-only reviews or vendor assurances lack independence or depth.

  1. ACritical analysis by objective, informed parties who can identify model limitations and assumptions and who have the incentives and influence to cause appropriate changesCorrect
  2. BA sign-off by the model developers confirming that the model passed their own back-testing
  3. CAn annual review performed by internal audit that checks only whether documentation exists
  4. DA vendor's written assurance that the purchased model complies with industry standards

Explanation

Effective challenge requires objectivity, competence, and the influence or standing to get issues remedied. Developer self-review lacks independence, an audit check of documentation lacks technical depth, and vendor assurance does not replace the bank's own challenge.

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