FRM Part II · FRM Exam Part II · Integrated Risk Management
A bank's risk committee notes that its credit, market and liquidity stress tests are each run by separate teams using unrelated macroeconomic assumptions. Which weakness of this arrangement is most directly addressed by building a single enterprise-wide scenario?
The main weakness is that siloed stress tests with inconsistent assumptions cannot show how a single shock affects several risk types simultaneously. An enterprise-wide scenario applies one coherent set of shocks across credit, market and liquidity risk, revealing interactions and compounding effects that separate tests miss.
- AEach risk type will no longer require its own risk metrics
- BInconsistent assumptions prevent the bank from seeing how one shock hits several risks at once and interacts across themCorrect
- CRegulatory capital requirements will fall because diversification is automatically recognized
- DHistorical data will no longer be needed to calibrate the scenarios
Explanation
A common scenario applies one coherent set of macro and market shocks to all risk types, so interactions such as credit losses coinciding with liquidity outflows become visible. Separate silos with unrelated assumptions miss these interactions. The scenario does not remove the need for separate metrics, lower regulatory capital, or eliminate historical calibration.
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