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

A bank's board is reviewing its stress testing governance. Which practice is most consistent with sound governance of an enterprise-wide stress testing program?

Senior management and the board should review and challenge scenarios, assumptions and results, and the results should inform capital, liquidity and risk appetite decisions. Isolating the program, using it only for regulators, or freezing scenarios for years weakens its governance and usefulness.

  1. ASenior management and the board review and challenge scenarios, key assumptions and results, and the results feed into decisions on capital, liquidity and risk appetiteCorrect
  2. BThe stress testing team alone chooses scenarios and assumptions to preserve independence from management
  3. CResults are produced for regulators only and not used in business decisions
  4. DScenarios are fixed for several years so that results are comparable over time without review

Explanation

Sound governance requires active board and senior management involvement in challenging scenarios and assumptions, and using results in strategic, capital and liquidity decisions. Excluding management or keeping results for regulators only undermines the program's use. Static scenarios fail to reflect evolving risks.

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