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

A bank's quantitative team that built a credit-loss model also performs its annual validation, arguing they know it best. Which governance weakness does this most directly represent?

The weakness is a lack of effective challenge. Supervisory guidance requires validation to be independent of model development and use, so that reviewers have the incentives and standing to critique assumptions. Developers validating their own model cannot provide that objective, critical review.

  1. AA lack of effective challenge because validation is not independent of developmentCorrect
  2. BInsufficient model documentation detail
  3. CAn overly conservative model inventory scope
  4. DExcessive reliance on vendor models

Explanation

Guidance requires validation to be performed by staff independent of development and use, with the competence, influence and incentives to challenge. Developers validating their own model undermines effective challenge. Documentation, inventory and vendor issues are not described in the scenario.

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