Groundlearn / Glossary / Model risk
Model risk
A FRM term, defined in plain English with the distinction examiners test.
What it means
The risk of loss from using a model that is wrong, or right but used outside the conditions it was built for.
The exam angle
Independent validation and clear statements of limitation are the controls. LTCM is the standard case study.
Where it appears in the syllabus
- Operational Risk & ResilienceFRM Part II · exam weight 20% · RCSA and loss data, model risk, cyber, third parties, financial crime, Basel.
- Current Issues in Financial MarketsFRM Part II · exam weight 10% · This cycle's readings — AI in finance, climate risk, digital assets, bank stress.
Related terms
- Operational riskThe risk of loss from failed internal processes, people and systems, or from external events.
- Rogue tradingUnauthorised positions concealed by an employee, typically enabled by weak separation between the front and back office.
- Bank runA self-fulfilling withdrawal of funding from an institution, where the rational individual choice to withdraw first…
- Basel AccordsThe international framework for bank capital and liquidity regulation, issued by the Basel Committee on Banking…
- Central counterpartyAn entity that interposes itself between the two sides of a trade, becoming buyer to the seller and seller to the buyer.
- Economic capitalThe capital a firm judges it needs to absorb unexpected losses at a chosen confidence level, computed internally.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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