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

A bank's stress test shows survival of 35 days under an idiosyncratic scenario, 20 days under a market-wide scenario, and 12 days under a combined scenario. The board's stated survival horizon for the combined scenario is 30 days. Which management response is most consistent with supervisory expectations?

The combined scenario survival of 12 days falls well short of the 30-day board horizon, so it should be escalated as a breach and addressed by raising liquidity buffers, cutting funding concentrations or revisiting risk appetite, not averaged or discarded.

  1. AAccept the result because the idiosyncratic horizon exceeds 30 days
  2. BAverage the three survival periods to 22.3 days and report it as the key measure
  3. CTreat the combined shortfall as a limit breach, and raise buffers or reduce funding concentrations or revise risk appetiteCorrect
  4. DRemove the combined scenario as it is unlikely to occur

Explanation

The combined scenario is the binding test against the stated 30-day horizon; 12 days is an 18-day shortfall. Supervisors expect escalation and action, such as buffers, funding diversification or revised risk appetite. Averaging masks the weakest result and dropping the scenario avoids the issue.

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