FRM Part I · FRM Exam Part I · Stress Testing
A bank's stress testing framework is criticised by an internal audit review. Which of the following findings would be the most serious governance weakness?
The most serious weakness is that management ignores stress results breaching risk appetite without documentation or challenge. This shows stress testing is not integrated into decision-making, undermining accountability. The other findings concern frequency or scope and are less fundamental than failure to act on results.
- AScenarios are updated annually rather than monthly
- BResults are reported to the risk committee but management's decision to ignore breaches of risk appetite is neither documented nor challengedCorrect
- CThe program uses both historical and hypothetical scenarios
- DReverse stress tests are performed for only the largest business lines
Explanation
The most serious weakness is the lack of accountability: if results that breach risk appetite are not acted on or challenged, stress testing has no influence on decisions. Annual updating, mixed scenario types and partial reverse stress testing are lesser issues or even good practice.
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