Explanation:

According to the Federal Reserve's SR 11-7 (Guidance on Model Risk Management), effective model validation should be an ongoing, continuous process rather than a static or point-in-time review. Option A is incorrect because internal auditors should maintain independence and not be the ones validating and backtesting the models they assess. Option B is incorrect because monitoring should be continuous and not delayed. Option C is incorrect because third-party vendor models must be validated using assumptions and conditions relevant to the bank's specific portfolio and usage, rather than blindly accepting the vendor's initial assumptions.

Question The board of directors of a fast-growing US-based bank is discussing the findings and recommendations in a report issued after a recent regulatory review of the bank's risk management framework. A board member notes that the regulators have identified deficiencies in the bank's model validation process and recommends that the CRO develop a plan for improvement in this area. The CRO consults the Federal Reserve guidelines for examples of best practices and identifies ways that the bank can improve its validation approaches to conform with the guidelines. Which of the following recommendations is appropriate for the CRO to make?

Require internal auditors that are responsible for assessing the bank’s model risk management framework to also validate and backtest the models.

Begin monitoring the performance of each model only after the backtest of the model has been successfully completed.

Ensure that any third-party vendor models used by the bank are implemented under the assumptions that were initially provided by the vendor.

Establish a continuous process of model risk management and validation rather than a process that conducts reviews at specific points in time.

Financial Risk Manager Part 2

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