FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank's risk function runs separate stress tests for credit, market and liquidity risk, each using its own scenario designed by the respective desk. The Chief Risk Officer wants to move to an enterprise-wide stress testing program. Which change would best achieve this objective?
The best change is to apply a common set of macroeconomic scenarios across all risk types and aggregate the results into overall capital and earnings projections. Enterprise-wide stress testing requires consistent scenarios and aggregation, whereas more severe or more frequent siloed tests still leave risks unintegrated.
- AApply a common set of macroeconomic scenarios across all risk types and aggregate the results into the bank's overall capital and earnings projectionsCorrect
- BIncrease the severity of each desk's own scenario so that every desk uses a more extreme shock
- CRun each risk-specific test more frequently and report the results to the desks separately
- DReplace scenario analysis with a single VaR calculation across all portfolios
Explanation
Enterprise-wide stress testing relies on consistent, firm-wide scenarios applied across risk types, with results aggregated to show the combined effect on capital, earnings and liquidity. Making silo scenarios more severe or more frequent does not integrate them. VaR is a statistical measure and does not replace scenario-based integration.
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