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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank runs an operational risk stress test for a major third-party payment processor outage lasting five days. Which approach is most consistent with sound practice for scenario design?

The scenario should be severe but plausible and capture direct losses, remediation costs and second-round effects like liquidity strain and customer attrition. Historical averages understate tail events, and outsourcing an activity does not remove the bank's responsibility for the resulting risk.

  1. AUse only historical internal loss data because hypothetical events cannot be quantified
  2. BBase the scenario on severe but plausible assumptions, including direct losses, remediation costs, and knock-on effects such as liquidity strain and customer attritionCorrect
  3. CCalibrate the scenario to the average annual operational loss so results are comparable year to year
  4. DExclude the scenario from capital planning because outsourced risk belongs to the vendor

Explanation

Operational stress scenarios should be severe but plausible, forward-looking, and capture direct and second-round effects including liquidity and reputation. Relying on average or internal history ignores tail events, and outsourcing does not transfer accountability for the risk.

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