FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
A bank's internal audit reviews its model risk program. A senior business head has repeatedly overridden validators' findings on a high-materiality pricing model, and the board receives only a summary stating that all models are 'validated'. Which finding best reflects a failure of governance regarding effective challenge under supervisory guidance?
The key failure is that validation findings are not backed by authority, escalation and board visibility. Effective challenge needs validators with influence whose material findings are resolved or escalated, and boards must see unresolved issues, not just a statement that models are validated.
- AValidators used benchmarking models rather than the production model
- BValidation findings lack standing because challenge is not backed by authority, escalation, and board visibility of unresolved issuesCorrect
- CThe pricing model has too many input parameters
- DValidation was scheduled more often than annually
Explanation
Effective challenge requires competence, influence and incentives; validators need authority to have issues addressed, with escalation to senior management and the board and reporting of material findings and exceptions. Overrides without escalation and summary-only reporting show this is missing. Benchmarking, parameter count and frequent validation are not governance failures.
Did you get it right without looking?
One question tells you little. A timed set on Supervisory Guidance on Model Risk Management shows your real accuracy, how long you take and where you lose marks.
More Supervisory Guidance on Model Risk Management questions
- A bank's VaR model shows 9 exceptions in 250 days at 99% confidence, while a validator notes the model passed an annual back-test last year.…
- According to SR 11-7, which statement about the relationship between model risk and model uncertainty is most accurate?
- A bank maintains a model inventory. An internal audit finds that several spreadsheet tools used to price illiquid positions are not listed b…
- A bank uses a model built for retail mortgage loss forecasting to estimate losses on a newly acquired commercial real estate book, reasoning…
- A bank wishes to use a vendor-supplied credit scoring model whose code is proprietary and cannot be shared. The model owner proposes skippin…
- A risk manager is asked to describe an aggregate view of model risk across the firm to the board. Which approach is most consistent with sup…