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

A bank's counterparty stress tests are criticised because each business line stresses its own counterparties using separate scenarios, and results are never aggregated at the firm level. Which improvement best reflects the post-crisis direction of counterparty stress testing?

The best improvement is an integrated firm-wide framework applying consistent scenarios across businesses, aggregating exposures to each counterparty, and feeding results into limits and capital planning. Siloed, desk-specific tests cannot reveal concentrated or correlated counterparty exposures across the firm.

  1. AUsing a firm-wide, integrated framework with consistent scenarios across businesses, aggregating exposures to the same counterparty and linked to limits and capital planningCorrect
  2. BReplacing stress tests with a single pre-crisis VaR number
  3. CRunning scenarios only for counterparties rated below investment grade
  4. DLetting each desk choose the severity to keep the results comparable

Explanation

Post-crisis practice moved to enterprise-wide stress testing with consistent scenarios, aggregation by counterparty and use in limit setting and capital planning. VaR alone, rating-based exclusion and desk-chosen severity all keep the fragmentation problem.

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