FRM Part I · FRM Exam Part I · Stress Testing
A bank's board is reviewing its stress testing framework. Which of the following best describes the role the board and senior management should play in a sound stress testing program?
The board and senior management should set the program's objectives, review and challenge scenarios and assumptions, and use the results in capital, liquidity and risk appetite decisions. Treating stress testing as a delegated or purely regulatory exercise undermines its value as a forward-looking management tool.
- ADelegate stress testing entirely to the risk modeling team and review only the final capital ratio
- BApprove the program's objectives and scenarios, challenge the assumptions, and use the results in decisions on capital, liquidity and risk appetiteCorrect
- CLimit scenarios to those that have occurred historically so that results are objective
- DUse stress tests only to meet regulatory submissions, with no link to business decisions
Explanation
Sound governance requires active board and senior management engagement: setting objectives, challenging scenarios and assumptions, and embedding results in strategic decisions such as capital planning and risk appetite. Delegating entirely or using tests only for compliance weakens the program. Restricting to historical scenarios ignores plausible but unprecedented events.
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