Skip to content

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

A bank's quantitative team builds a credit scoring model and, to save time, the same developers also perform the annual validation of that model. Under supervisory guidance on model risk management (SR 11-7), which weakness does this arrangement most directly create?

The arrangement most directly undermines independence. Supervisory guidance says validation must be carried out by people independent of model development and use, so they can provide effective challenge. Developers reviewing their own model have incentives to defend it and cannot give an objective critical assessment.

  1. AA lack of independence needed for effective challengeCorrect
  2. BInsufficient model documentation
  3. CExcessive reliance on vendor models
  4. DFailure to inventory the model

Explanation

Guidance requires validation to be performed by staff with appropriate incentives, competence and influence who are independent of model development and use. Developers validating their own model undermine effective challenge. The other issues are not created by this arrangement.

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.

Practise Supervisory Guidance on Model Risk ManagementFree diagnostic mock

More Supervisory Guidance on Model Risk Management questions