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

A bank's risk team has built a new credit loss forecasting model. Under supervisory guidance on model risk management (SR 11-7), which statement best describes the purpose of the model development stage's documentation of theory and assumptions?

Model documentation should be detailed enough for a knowledgeable third party to understand the model's design, theory, assumptions and limitations without depending on the developer. This supports validation, control and continuity. It does not replace independent validation or shift accountability.

  1. AIt allows a knowledgeable third party to understand the model's design, limitations and key assumptions without relying on the developerCorrect
  2. BIt transfers accountability for the model's performance from the business user to the developer
  3. CIt removes the need for independent validation because the developer has already tested the model
  4. DIt is needed only for vendor models, since internally built models are self-explanatory

Explanation

Guidance expects documentation detailed enough that parties unfamiliar with the model can understand how it operates, its limitations and assumptions. It supports validation, maintenance and continuity. It does not replace independent validation or shift accountability.

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