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 macroeconomic scenario and then adds the resulting losses together. Which weakness is most directly addressed by moving to an enterprise-wide integrated stress test?
The main weakness addressed is that siloed tests use inconsistent scenarios and ignore interactions and feedback effects between risk types. An enterprise-wide integrated test applies one coherent scenario across credit, market and liquidity risk and captures how losses in one area amplify others.
- AThe separate tests cannot be run more often than annually
- BInconsistent scenarios and the omission of interactions and feedback effects across risk typesCorrect
- CSimple addition of losses always understates the capital buffer required by regulators
- DSiloed tests make it impossible to use any expert judgment
Explanation
Integrated stress testing applies one coherent scenario across all risk types and captures interactions such as market losses worsening liquidity or credit conditions. Siloed tests with different scenarios miss these links. The other options describe issues that are not the defining weakness of silos.
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