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

Under supervisory guidance on model risk management (SR 11-7 style), which statement best describes the role of a bank's board of directors in model risk governance?

The board approves the model risk management framework and oversees senior management's implementation of it. Validation, development and parameter calibration are operational activities performed by validators, developers and model owners, not by the board, which is responsible for tone, accountability and overall oversight.

  1. AApproving the model risk management framework and ensuring senior management implements it, with overall oversight of model riskCorrect
  2. BPerforming independent validation of each material model before it is placed in production
  3. CDeveloping and back-testing the models used by trading desks
  4. DSetting the numerical parameters of each model to keep output within risk appetite

Explanation

The board sets the tone, approves the firm-wide model risk policy and holds senior management accountable for implementation. It does not carry out validation or development work, which belong to independent validators and model owners/developers. Parameter setting is an operational task for model developers.

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