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

A mid-sized bank's board of directors is reviewing its responsibilities under supervisory guidance on model risk management (SR 11-7 style). Which action is most consistent with the board's role?

The board should approve the model risk management framework and policies and review them and related risk reports regularly. Boards set direction and hold management accountable; they do not validate models, design specifications or choose software, which are tasks for qualified staff.

  1. AApproving the firm's model risk management framework and policies, and reviewing them at least annually along with reports on model riskCorrect
  2. BPersonally validating each high-impact model before it is placed into production
  3. CDeveloping the mathematical specifications of models used for trading
  4. DSelecting the statistical software and coding standards used by model developers

Explanation

Supervisory guidance places ultimate accountability for model risk with the board and senior management. The board sets the risk appetite, approves the framework and policies, and receives regular reporting. Validating models, specifying mathematics and choosing software are operational tasks for staff, not board duties.

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