Skip to content

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

A bank's risk team is asked to report model risk on an aggregate basis to the board. Which approach best reflects the supervisory guidance on aggregate model risk?

Aggregate model risk should be assessed by looking at interactions and dependencies among models, shared data and assumptions, and how errors could compound across combined exposures. It is not a simple sum of individual ratings, nor just the largest model's risk or a count of validations.

  1. AReport only the number of models validated in the year, since it is a measure of control activity
  2. BAssess aggregate model risk by considering interactions and dependencies among models, common assumptions and data, and the effect of model errors on combined exposuresCorrect
  3. CSum the individual model risk ratings of all models to produce one total score
  4. DTake the model risk of the single most material model as the bank's aggregate model risk

Explanation

The guidance says aggregate model risk is not simply the sum of individual risks. It depends on interactions, shared inputs, common assumptions and how errors compound or offset across models. Summing ratings ignores correlation and dependencies, and counting validations says nothing about the risk level.

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