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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's board receives a liquidity stress test report showing that under a combined idiosyncratic and market-wide scenario the bank's survival horizon is 22 days, against a board-approved minimum of 30 days. Which response is most consistent with sound governance of stress test results?

The board should require management to present remedial actions, such as a larger buffer or funding limit changes, and embed the result in risk appetite and contingency funding planning. A survival horizon below the board minimum must drive decisions, not be ignored or tuned away by softening the scenario.

  1. ANote the result, since stress scenarios are by design implausible and need not drive decisions
  2. BRecalibrate the scenario to be milder so the survival horizon exceeds 30 days
  3. CRequire management to present actions, such as increasing the buffer or adjusting funding limits, and integrate the result into the risk appetite and contingency funding planCorrect
  4. DDelegate the matter entirely to the treasury desk and revisit it at the next annual review

Explanation

Governance expects results to be escalated and used in decisions on risk appetite, limits, buffer sizing and contingency funding. A breach of the board minimum requires remedial action. Weakening the scenario merely to pass defeats the purpose, and ignoring or delaying the result is not acceptable.

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