Skip to content

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

A bank's quantitative team has built a new credit-scoring model. The head of the same team proposes that team members also perform the independent validation to save time. Under supervisory guidance on model risk management (SR 11-7), what is the main weakness of this proposal?

The weakness is lack of independence. Effective challenge requires validators who are competent, objective and incentivised separately from model developers, with enough influence to force fixes. Having developers validate their own model undermines this, although external parties are not mandatory.

  1. AValidation must be performed by external consultants only
  2. BValidation staff need incentives, competence and influence independent of model development to provide effective challengeCorrect
  3. CValidation is only required for models that have already produced losses
  4. DDevelopers lack the technical skill to test their own models

Explanation

Effective challenge requires critical analysis by objective, informed parties who can identify limitations and have the influence to get issues addressed. Developers validating their own work compromise independence. External consultants are allowed but not required, so the first option overstates the rule.

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