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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's risk committee wants its stress testing program to capture how a severe shock in one risk type, such as a sharp fall in asset prices, can trigger losses in other risk types, such as liquidity and operational risk. Which feature of an integrated stress test best addresses this objective?

A single, internally consistent scenario applied across all risk types, including their interactions, best captures cross-risk contagion. Separate stress tests added together ignore feedback effects, such as market losses causing liquidity strain, and so may understate the combined impact on the bank.

  1. ARunning separate stress tests for each risk type and summing the results
  2. BUsing a single scenario with consistent macroeconomic assumptions applied across all risk types, including their interactionsCorrect
  3. CApplying historical 99% VaR to each business line independently
  4. DLimiting scenarios to events that occurred in the past ten years

Explanation

An integrated stress test applies one coherent scenario across risk types so that interactions and feedback effects are captured. Summing separate tests ignores interactions and dependencies, and may misstate total loss.

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