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

A bank's board is assessing governance of its stress testing framework. Which arrangement is most consistent with sound supervisory expectations for board and senior management responsibilities?

The board and senior management should actively review scenarios, assumptions and limitations, challenge results, and use them in capital, strategy and risk appetite decisions. Pure delegation to modelers or business lines weakens oversight and makes stress testing a mechanical exercise.

  1. AThe board delegates all stress testing decisions to the quantitative modeling team and reviews only final capital ratios
  2. BSenior management approves scenarios and assumptions, while the board has no role in challenging results
  3. CThe board and senior management actively review scenarios, key assumptions and limitations, and results inform strategy, capital and risk appetite decisionsCorrect
  4. DStress testing is run independently by business lines with no central oversight to preserve objectivity

Explanation

Sound governance requires board and senior management engagement: understanding scenarios, assumptions and limitations, challenging results, and using outputs in capital planning, strategy and risk appetite. Delegating wholly to modelers or business lines lacks oversight.

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