FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank's risk committee reviews its stress testing program. Credit, market and liquidity teams each run their own scenarios using different macroeconomic assumptions and report separately to the board. Which weakness of this approach is MOST directly addressed by an enterprise-wide stress testing framework?
Enterprise-wide stress testing addresses the failure to capture interactions and feedback effects across risk types. Separate silo tests use inconsistent macro assumptions, so the aggregate impact is misstated. A common coherent scenario applied across credit, market, liquidity and other risks lets the bank aggregate results and see compounding effects.
- AScenarios are too severe to be plausible
- BInteractions and feedback effects across risk types are not captured because assumptions are inconsistentCorrect
- CStress tests are performed too frequently
- DReverse stress tests replace the need for scenario analysis
Explanation
Silo-based testing with differing macro assumptions cannot capture how losses in one risk area amplify others, such as market losses triggering funding stress. An enterprise-wide approach applies a common, coherent scenario across all risk types and aggregates the results. Severity and frequency are not the core issue here.
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