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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank's risk committee is reviewing its stress testing program. Which of the following best describes the primary purpose of a stress test as described in supervisory guidance on stress testing banks?

A stress test's main purpose is to evaluate how vulnerable a bank is to exceptional but plausible adverse events and to feed the results into capital, liquidity and risk decisions. It complements rather than replaces VaR and does not give a precise probability-weighted loss estimate.

  1. ATo provide a precise probability-weighted estimate of the bank's expected loss over the next year
  2. BTo assess the bank's vulnerability to exceptional but plausible events and inform capital and risk decisionsCorrect
  3. CTo replace VaR as the sole measure of market risk capital
  4. DTo verify that historical loss data conforms to a normal distribution

Explanation

Stress tests examine the effect of exceptional but plausible adverse events on a bank's financials and capital, complementing statistical measures such as VaR. They are not designed to produce probability-weighted expected loss estimates, and they do not replace other risk measures.

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