FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
Several of a bank's trading, credit and ALM models rely on the same vendor's curve-construction library. A bug is discovered in the library. Which aggregation concern does this best illustrate?
This illustrates concentration or common-factor dependency: one shared vendor library creates a single point of failure, so a bug propagates across many models at once. Aggregate model risk assessment must account for such correlated errors rather than treating each model as independent.
- AConcentration and common-factor dependency, where one vendor error propagates across multiple modelsCorrect
- BModel drift caused by changes in market regime
- COverfitting in the bank's internal development process
- DBenchmarking bias from using an inappropriate peer model
Explanation
A single shared vendor component creates a common point of failure, so errors are correlated across models. This is a concentration or common-dependency issue central to aggregating model risk. The other options describe different problems not driven by a shared component.
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