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

A bank's board receives liquidity stress test results showing a 30-day survival horizon under the severe scenario, against a board-approved minimum of 45 days. Which response best reflects sound governance and use of results?

The board should escalate the breach and require management to present remedial actions, such as increasing the liquid asset buffer or extending funding maturities, then monitor them to completion. Changing the scenario or the limit simply to fit the result undermines the stress test's governance purpose.

  1. ANote the result and wait for the next scheduled test before taking any action
  2. BEscalate the breach, require management to present remedial actions such as building the buffer or lengthening funding maturities, and track them to completionCorrect
  3. CSoften the scenario assumptions so that the survival horizon meets the 45-day minimum
  4. DLower the board's minimum survival horizon to 30 days to reflect current conditions

Explanation

Stress results must feed decisions. A breach of the board-approved tolerance should be escalated, with management proposing remediation that is monitored. Weakening assumptions or lowering the limit to fit the result defeats the purpose of the test.

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