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Answer: Complying with the Basel principles should reduce the bank's exposure to model risk as the quality of data input in a model will likely improve.
## Explanation **B is correct.** Implementing the Basel principles (specifically BCBS 239) will help reduce the bank's exposure to model risk by increasing the integrity of the data used as inputs into the models. ### Key Points: - Data acquisition plays a crucial role in model risk management - Financial institutions rely on models for day-to-day operations and risk analysis - Even small model errors can have significant consequences - Model risk consists of four components: input risk, estimation risk, valuation risk, and hedging risk - Data quality directly impacts input risk - the principle of "garbage-in, garbage-out" applies ### Why other options are incorrect: **A is incorrect:** BCBS 239 promotes standardization of data management across business units, not departmental customization. The chief data officer (CDO) function was largely driven by BCBS 239 to ensure consistent data standards across the organization. **C is incorrect:** The exponential increase in AI techniques actually makes BCBS 239 compliance more challenging due to the complexity of AI models and their data requirements. **D is incorrect:** While independent validation is necessary, BCBS 239 does not recommend outsourcing model validation. The validation should be done internally to ensure it aligns with the bank's specific risk profile.
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The board of directors of a mid-size bank has recommended that the bank adopt the Basel principles for data aggregation and risk reporting. The bank currently has three different business units for its retail banking, commercial banking, and credit card operations. It also maintains some internally developed models and is introducing artificial intelligence (AI) techniques in data management. In assessing the impact and best practice of complying with the Basel principles for data aggregation and risk reporting, which of the following statements is most appropriate?
A
Business units of the bank should adopt departmental applications and methodologies for data management that are customized for each business unit.
B
Complying with the Basel principles should reduce the bank's exposure to model risk as the quality of data input in a model will likely improve.
C
An exponential increase in the application of AI techniques in data management is not likely to impose additional challenges to the compliance with Basel principles.
D
The Basel principles recommend that the bank outsource its model validation function to an external third party in order to provide an independent review.