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

A bank's model validation team reports to the head of the trading desk that uses the models it reviews. The desk head also sets the validators' bonuses. Which supervisory concern is most directly raised?

The main concern is lack of independence and effective challenge. Validators reporting to, and compensated by, the desk that uses the models may be reluctant to criticize them. Guidance requires validation staff to have independent incentives, competence and organizational standing to challenge model developers and users.

AValidation lacks sufficient independence and effective challenge from model owners and usersCorrect
BModels are being validated too frequently
CModel documentation is too detailed for validators to review
DThe bank is relying on vendor models instead of internal models

Explanation

Guidance requires validation to be conducted by staff with appropriate incentives, competence and influence, independent of model development and use. Reporting to and being paid by the user compromises objectivity and weakens effective challenge. Frequency, documentation detail and vendor use are not what the facts describe.

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