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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 run separately by each business line using their own scenarios, and results are not aggregated. Which improvement best follows the evolution toward enterprise-wide counterparty stress testing?

The firm should run a common set of scenarios across all business lines and aggregate exposures by counterparty and connected group. This reveals concentrations and lets management compare stressed exposures with limits and capital, which siloed desk-level testing cannot do.

  1. ALet each desk choose its own scenarios so results are not comparable across the firm
  2. BRun a common set of scenarios across all business lines, and aggregate exposures by counterparty and by connected group to compare with limits and capitalCorrect
  3. CReport only the average exposure across desks to senior management
  4. DStop reporting stress results for counterparties with investment grade ratings

Explanation

Enterprise-wide testing uses consistent scenarios and aggregates exposures to a counterparty and its affiliates across desks, so that concentrations and capital impact are visible. Desk-specific scenarios, averages, or excluding rated names hide concentrations.

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