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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's stress test shows a 30-day cumulative net outflow under a severe combined scenario that exceeds its high-quality liquid assets (HQLA) by a material margin. The board reviews the result. Which response best reflects appropriate use of stress test results?

The board should use the shortfall to inform the contingency funding plan, limits and buffer sizing, for example by holding more HQLA or lengthening funding tenor. Dismissing the scenario as unlikely or weakening it to fit the existing buffer defeats the purpose of stress testing.

  1. AIntegrate the result into the contingency funding plan, liquidity limits and buffer sizing, and consider actions such as lengthening funding tenor or increasing HQLACorrect
  2. BDismiss the result because the scenario is unlikely to occur
  3. CRecalibrate the scenario to be milder until the buffer is sufficient
  4. DDisclose it only to the regulator and take no internal action

Explanation

Stress results should drive decisions: limit setting, buffer size, funding structure and contingency plans. Dismissing on probability grounds ignores that stress tests examine plausible severe events. Softening the scenario to fit the buffer defeats the purpose and is a governance failure.

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