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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

A bank's counterparty credit risk stress tests are produced by the risk function and presented to the board each quarter. Senior management has never changed a limit or a hedging decision as a result. Which governance weakness does this most directly indicate?

The weakness is that stress test results are not integrated into decision-making. Good governance requires results to inform limits, hedging, capital planning and risk appetite. Reports that are reviewed but never change any action show the program is a compliance exercise rather than a management tool.

  1. AStress test results are not integrated into decision-making such as limit setting and risk appetiteCorrect
  2. BThe stress tests use too many scenarios
  3. CThe stress tests are run too conservatively by the risk function
  4. DThe bank relies on internal rather than external ratings

Explanation

Supervisory guidance stresses that stress testing must feed into decision-making, including limits, capital planning and risk appetite. Producing reports that never influence action means the program is not embedded in governance. The other options describe features that do not explain the lack of action.

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