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Question

To mitigate concerns relating to model risk and significant variability in expected credit loss models, the Discussion Paper proposes the following mitigants, EXCEPT:  

A Issuing broad guidance by RBI for designing credit risk models Correct Answer Incorrect Answer
B Requiring independent validation of expected credit loss models Correct Answer Incorrect Answer
C Specifying a prudential floor for provisions based on comprehensive data analysis Correct Answer Incorrect Answer
D Allowing banks to use any internal assessment without validation Correct Answer Incorrect Answer
E Prescribing a non-exhaustive list of disclosures by banks Correct Answer Incorrect Answer

Solution

Allowing banks to use any internal assessment without validation     Explanation: The Discussion Paper proposes independent validation of expected credit loss models to verify compliance with RBI guidance, sound reasoning, calibrated use of relevant data, proper back-testing, and internal validation to remove bias. This is to mitigate concerns relating to model risk and variability.  

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