hard · Frm Part 2 Operational Risk
A Chief Risk Officer (CRO) is reviewing the bank's model risk tiering system. The current inventory has 50 Tier-1 models (e.g., pricing engines for exotics), 150 Tier-2 models, and 300 Tier-3 models.
If the validation team has a capacity of 800 reviewer-weeks per year and Tier-1 models require 10 weeks each for a full annual validation, what is the most significant structural risk if Tier-2 models are scheduled for 4 weeks of review every two years?
- Tier-3 models are over-weighted in the resource allocation, leading to superficiality in Tier-1.
- The 10-week validation period for Tier-1 is excessive compared to the Basel benchmark of 4 weeks.
- The biennial cycle for Tier-2 models creates a Type I error in backtesting.
- The validation backlog will leave Tier-1 models stale as capacity is exceeded (500 Tier-1 + 300 annualized Tier-2 = 800 weeks, leaving zero for Tier-3).
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