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Validation and Control Processes - De Laurentis

bollinez123

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Hi everyone

I couldn't find a thread about my issue, but feel free to put it somewhere else in case I missed it.

I am currently repeating Operational Risk and since I failed last P2 exam, I really really want to understand everything now instead of getting only a routine in doing questions.

So, my problem is that I just don't understand the meaning behind the structure shown in De Laurentis Ch 5 "Validating Rating Models" table "Processes and roles of validation and control of internal rating systems":

De Laurentis.PNG

Especially the owner part and third layer is not so clear to me. There is a column only for "Management decision", but it seems the third layer is already respresenting the management decision types. Of course, the final decision is made by the top management and BoD, but what is this table actually telling me then?

I found this topic quite important, as in several FRM study resources it is highlighted as critical for the exam. I just don't want to learn it by heart without getting something out of it.

I would highly appreciate somebody explaining me the sense behind this table :confused:

Thanks in advance!
 
#2
What makes you think specifically this table is critical for the exam?

I am reading the four learning objectives GARP has laid out for this reading, and perhaps one can make a case this table is related to the first bullet point.

This is very qualitative so there is a degree of subjectiveness here. My take on this table is it is a bottom-up approach.

My interpretation is that the owners in first row are at the bottom level (e.g business line management). In the second row there is an audit or verification/validation done of the work in first row. Third and fourth row are, C-level execs (row 3) and “top” management (row 4). What’s difference between row 3 and 4?

-Row 1: internal business units
-Row 2: independent from row 1 but help verify/validate
-Row 3: C-level execs/senior management: review results from people in row 1 & 2. Disseminate critical info to top management or board of directors.
-Row 4: top management and board of directors: supervise / hire the c-level execs. In the first reading in OP risk it said they also approve the risk appetite / risk tolerance.

Row 4 is even titled “accountability for supervisory purposes”, so put simply row 4 is accountable for supervising row 3.
 
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