FRM Part I · FRM Exam Part I · Stress Testing
A bank's board is reviewing its stress testing program. Which of the following is the most appropriate role for the board and senior management under good governance practice?
The board and senior management should set the stress testing program's objectives, critically challenge scenarios and assumptions, and use the results in capital, liquidity and risk appetite decisions. Passive delegation or sole reliance on regulatory tests leaves stress testing disconnected from strategy and weakens its value as a risk management tool.
- ADelegate all scenario design and result interpretation to the risk modelling team and review only a summary once a year
- BSet the program's objectives, challenge scenarios and assumptions, and use results in decisions on capital, liquidity and risk appetiteCorrect
- CApprove only the quantitative models and leave the use of results to business line managers
- DRely on regulatory stress tests so that internal stress testing is unnecessary
Explanation
Good governance requires active engagement by the board and senior management: defining objectives, challenging scenarios and assumptions, and embedding results in strategic decisions such as capital planning and risk appetite. Delegating everything to modellers or relying only on regulatory tests leaves the program disconnected from decision-making.
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