Skip to content

FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

A bank's stress-test report shows a 30-day survival horizon of 45 days under an idiosyncratic scenario but only 12 days under a combined market-wide and idiosyncratic scenario. Which interpretation and management response is most appropriate?

The bank is vulnerable to market-wide stress, so the board should review buffers, funding concentration and contingency actions against the combined scenario. A 12-day horizon is below the 30-day target. Averaging scenarios or ignoring market-wide events would hide the binding weakness.

  1. AThe result is inconsistent and the combined scenario should be dropped from reporting
  2. BThe bank is adequately protected because the average of the two horizons exceeds 30 days
  3. CThe bank is vulnerable to market-wide stress, so the board should review buffer size, funding concentration and contingency actions against the combined scenarioCorrect
  4. DOnly the idiosyncratic scenario matters because market-wide events are outside management control

Explanation

A shorter survival horizon under the severe combined scenario shows a weakness that the milder scenario hides, since asset sales and funding market access degrade together. Averaging horizons is meaningless, and dropping the scenario hides risk. Management should act on the binding scenario.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Risk Reporting and Stress Testing shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Risk Reporting and Stress TestingFree diagnostic mock

More Liquidity Risk Reporting and Stress Testing questions