FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
During validation of a bank's loan loss model, the validator re-estimates the model using an alternative methodology and compares the outputs with the production model's. Which core element of validation does this activity most directly represent?
This is benchmarking, which falls under evaluating conceptual soundness. The validator compares the production model with an independently built alternative to test design choices and assumptions. It is distinct from outcomes analysis, which compares forecasts with realized results, and from ongoing monitoring.
- AOngoing monitoring of process verification
- BGovernance and policy review
- CEvaluation of conceptual soundness through benchmarkingCorrect
- DOutcomes analysis using back-testing
Explanation
Building an alternative model and comparing results is a benchmarking/challenger exercise, which supports assessing conceptual soundness. Outcomes analysis compares forecasts to realized results; ongoing monitoring tracks performance after implementation.
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