FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank's stress test assumes that, during the scenario, the bank cuts its dividends and continues to extend new loans at pre-stress growth rates to maintain market share. Which concern would a supervisor most likely raise about these capital action and balance sheet assumptions?
Supervisors would question whether the balance sheet growth assumption is consistent with the scenario and realistic. Continuing pre-stress loan growth during a severe downturn is hard to justify, whereas capital action assumptions must also be plausible and documented.
- ACutting dividends is never a permissible management action in a stress test
- BBalance sheet growth assumptions should be consistent with the scenario and the bank's realistic capacity, rather than ignoring stress conditionsCorrect
- CLoan growth should always be assumed to be zero in every scenario
- DCapital actions should be excluded from the projection entirely
Explanation
Supervisors expect balance sheet and capital action assumptions to be plausible and consistent with the stress. Assuming unchanged strong loan growth in a severe downturn may be unrealistic, while dividend cuts can be reasonable if justified. Assuming zero growth always or excluding actions is not required.
Did you get it right without looking?
One question tells you little. A timed set on Stress Testing Banks shows your real accuracy, how long you take and where you lose marks.
More Stress Testing Banks questions
- A bank designs a severe scenario with a deep recession, but assumes equity prices fall sharply while credit spreads narrow and the currency …
- Which practice best supports the governance of a bank's enterprise-wide stress testing program?
- Under the supervisory approach to capital stress testing, a bank starts with a CET1 ratio of 11.0%. Projected stress-period losses and other…
- A bank's stress test results show that a severe scenario would reduce CET1 capital by 3.0 percentage points from a starting ratio of 11.5%. …
- A bank's board has approved a stress testing framework. Senior management proposes that the business lines that own the portfolios being tes…
- Under supervisory expectations for stress testing, a bank's senior management wants to use the program for more than a regulatory compliance…