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

A bank's liquidity stress test is run by treasury using models it developed and maintains, with no independent review. The assumptions have not changed in three years despite shifts in the funding mix toward digital deposits. Which governance weakness is MOST significant?

The most significant weakness is the absence of independent validation and of periodic review of assumptions as funding behavior changes. Digital deposits may run off faster than legacy assumptions imply, so unchallenged, stale models can understate liquidity risk and weaken the reliability of stress test results.

  1. AThe test is run too frequently
  2. BLack of independent validation and no periodic review of assumptions against changing funding behaviorCorrect
  3. CThe scenarios are too severe relative to the buffer
  4. DResults are being reported to the asset-liability committee

Explanation

Sound governance requires independent challenge and validation of models and regular reassessment of assumptions, particularly as the funding profile changes. Digital deposits may run off faster than legacy assumptions. Reporting to ALCO is appropriate, and nothing indicates excessive frequency or severity.

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