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

Under the supervisory guidance on model risk management (SR 11-7), which of the following best describes the definition of a 'model'?

SR 11-7 defines a model as a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories and assumptions to turn input data into quantitative estimates. Purely qualitative judgments or tools that do not produce quantitative estimates fall outside this definition.

  1. AAny spreadsheet used by a bank employee, regardless of whether it produces quantitative estimates
  2. BA quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories and assumptions to process input data into quantitative estimatesCorrect
  3. CA regulatory capital rule that prescribes fixed risk weights to exposures
  4. DA qualitative judgment made by senior management about future business strategy

Explanation

SR 11-7 defines a model as a quantitative method, system, or approach that applies theories, techniques, and assumptions to process input data into quantitative estimates. A spreadsheet is a model only if it meets this definition, so the first option is too broad. Qualitative judgments and fixed rule tables do not meet the definition on their own.

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