FRM Part I · FRM Exam Part I · Stress Testing
A bank's board is reviewing how its stress testing program should be governed. Which of the following arrangements best reflects sound stress testing governance practice?
Sound governance has the board and senior management actively involved in scenario setting, results review and management actions, supported by documented policies and independent validation. Limiting stress testing to the risk function, trading desks or regulatory reporting weakens challenge and prevents results from informing decisions.
- AStress tests are designed and run solely by the risk function, with results shared only with regulators
- BSenior management and the board are actively involved in setting scenarios, reviewing results and deciding on actions, with documented policies and independent validationCorrect
- CThe board approves the stress testing policy once and delegates all later review to the trading desks whose positions are tested
- DStress test results are used only for regulatory reporting and are excluded from strategic decisions to avoid influencing business plans
Explanation
Effective governance requires board and senior management engagement, clear documented policies, and independent review or validation of models and assumptions. Restricting results to regulators or delegating oversight to the tested desks creates conflicts and weakens the link between stress testing and decisions.
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