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

A bank's model risk policy states that a model's developer must not be the sole party who assesses whether the model is fit for use. Under SR 11-7 supervisory guidance, which feature of model validation does this requirement most directly reflect?

The requirement reflects effective challenge under SR 11-7: objective, informed parties independent of model development must critically assess the model and its limitations. Developer-only assessment lacks independence and incentive to identify weaknesses, so it cannot satisfy supervisory expectations for validation.

  1. AEffective challenge by objective, informed parties independent of model developmentCorrect
  2. BDelegating model ownership to the internal audit function
  3. CLimiting validation to models classified as high materiality only
  4. DReplacing ongoing monitoring with annual developer sign-off

Explanation

SR 11-7 requires effective challenge: critical analysis by objective, informed people with the competence, influence and incentives to identify limitations and push for change. Independence from development is central to this. Validation is not restricted to the developer, and monitoring is still required.

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