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FRM Part I · FRM Exam Part I · Stress Testing

A bank's board is reviewing its stress testing program. Which of the following practices best reflects sound governance of stress testing?

Sound stress testing governance means the board and senior management actively help set scenarios, challenge assumptions, review results, and use them in decisions. Limiting results to the risk function or regulators, freezing scenarios, or using tests only for minimum capital undermines the program.

  1. AStress testing is run solely by the risk function with results shared only with regulators
  2. BScenarios are designed once and left unchanged to keep results comparable over time
  3. CSenior management and the board are actively involved in setting scenarios and reviewing results, and the results feed into decision makingCorrect
  4. DStress testing results are used only to calculate minimum regulatory capital

Explanation

Sound governance requires active board and senior management engagement, including challenge of scenarios and use of results in strategic and risk decisions. Restricting results to the risk function or regulators, freezing scenarios, or using tests only for minimum capital all weaken the program's usefulness.

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