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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank's stress testing team is projecting pre-provision net revenue (PPNR) under a severely adverse macroeconomic scenario. Which approach is most consistent with supervisory expectations for modeling PPNR?

Revenue components should be linked to scenario variables and balance sheet assumptions. Ignoring the scenario, using historical growth rates, or arbitrarily zeroing revenue does not produce a credible, internally consistent PPNR projection under stress.

  1. AAssume net interest income and fee income stay at their latest actual levels because revenue is not affected by the scenario
  2. BLink revenue components such as net interest income, fees and trading income to scenario variables and the bank's balance sheet assumptionsCorrect
  3. CProject revenue by applying the bank's historical average growth rate irrespective of scenario conditions
  4. DSet revenue to zero in the worst quarter to remain conservative

Explanation

Stress revenue projections should respond to scenario variables (rates, GDP, volatility, volumes) and be consistent with balance sheet projections. Holding revenue flat or using historical averages ignores the scenario, and arbitrary zeroing is not a model-based, supportable estimate.

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