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

A bank's credit scoring model was built by the quantitative team that now also performs its annual validation, reporting to the same manager. Which SR 11-7 concern is most directly raised?

The main concern is lack of independence in validation. SR 11-7 expects validators to be separate from developers and users so they can provide objective effective challenge. When builders validate their own model under the same manager, incentives conflict and the challenge is weakened.

  1. AInsufficient model documentation
  2. BLack of independence in validation, weakening effective challengeCorrect
  3. COverly frequent outcomes analysis
  4. DExcessive reliance on vendor models

Explanation

SR 11-7 requires validation to be performed by staff with appropriate incentives, competence and influence, independent of model development and use. Having the developers validate their own model under the same manager compromises objectivity, so effective challenge is weakened. Documentation, frequency and vendor issues are not indicated.

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