Explanation:
The correct answer is A.
Negative feedback from a supervisory review regarding model risk management indicates that a firm failed to adhere to regulatory expectations or best practices. Using models without proper validation or continuing to use models with identified and unmitigated weaknesses exposes the BHC to significant model risk and would certainly attract negative supervisory feedback.
On the other hand, options B, C, and D represent sound model risk management practices. Using benchmark/challenger models (Option B) provides a robust way to test primary models. Employing independent validation staff (Option C) is a core requirement for effective model governance. Transparency about the validation status of models used in capital planning (Option D) is also highly encouraged by regulators to ensure that board members and senior management are fully aware of any potential limitations.
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Q.2238 A BHC in Mississippi, USA, was recently subjected to a supervisory review of its model risk management. Following the exercise, the company received negative feedback. Which of the following could have led to such an outcome?
A
Using models without validation or models that had identified weaknesses.
B
Using benchmark or challenger models to help assess the reasonableness of the primary model output.
C
Employing independent validation staff to critically evaluate the models.
D
Being too transparent about the validation status of all models used for capital planning.
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