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

A bank's credit team builds a new loan-pricing model. During development, the modeler documents the theory, the data sources and the reasons for the chosen approach. Under supervisory guidance on model risk management (SR 11-7), what is the primary purpose of this documentation?

Model documentation should be detailed enough for a knowledgeable third party to understand the design, theory, assumptions and limitations and to recreate the model. It supports validation, continuity and control, but it does not shift accountability or remove the need for ongoing monitoring.

  1. ATo allow a knowledgeable third party to understand the model's design, assumptions and limitations and to recreate itCorrect
  2. BTo transfer accountability for the model from the developer to the validation team
  3. CTo satisfy the audit committee that the model has no limitations
  4. DTo avoid the need for ongoing monitoring after implementation

Explanation

Guidance expects documentation detailed enough that parties unfamiliar with the model can understand how it operates, its limitations and key assumptions. It also supports continuity and validation. It does not transfer accountability, show an absence of limitations, or replace monitoring.

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