medium · FRM Part 2 Operational Risk
A model validation team identifies 'unexplained conservatism' in a new credit scoring model.
According to Model Risk Management (MRM) best practices, why is this conservatism considered a risk rather than a safety feature?
- It makes the model 'un-elicitable' under the Pinball loss function.
- It increases the likelihood of Type II errors in backtesting.
- It violates the principle of 'independence' between the first and second lines.
- It distorts business decisions like pricing and capital allocation in hidden ways.
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