FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
A bank's risk model is used by traders for limit setting. Users notice the model performs poorly under conditions outside its calibration range and begin applying informal manual overrides without recording them. Which supervisory expectation is most directly breached?
The breach is failing to document and monitor overrides and limitations. Guidance expects users to understand model limits, and override use to be recorded and analyzed, since frequent overrides may indicate a deficient model. Overrides are not prohibited, but they must be controlled and visible.
- AModels must be recalibrated daily
- BModel limitations and overrides should be recognized, monitored and documented, with users informed of themCorrect
- COverrides are prohibited in all circumstances
- DOnly the developer may decide how the model is used
Explanation
Guidance expects that model use be consistent with intended purpose, that limitations be understood by users, and that overrides be tracked and analyzed since frequent overrides can signal a deficient model. Overrides are not banned outright, and daily recalibration is not required.
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