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FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

Which feature of a bank's validation framework best supports the principle of effective challenge of its VaR model?

Effective challenge requires validation by independent, competent staff who have the authority to question assumptions, test the model critically and escalate findings. Developers reviewing their own work, annual capital-number checks, or unreviewed outsourcing do not provide this independent, critical scrutiny.

  1. AValidation performed by staff independent of model development, with the authority and competence to question assumptions and escalate findingsCorrect
  2. BValidation performed by the model's developers using the same code and data
  3. CValidation limited to annual review of the final capital number
  4. DValidation outsourced with no internal review of findings

Explanation

Effective challenge needs independence, competence and influence so that reviewers can critically question the model and have issues addressed. Developer self-review lacks independence, and limited annual or unreviewed outsourced work lacks authority and depth.

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