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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A bank's supervisor wants to use findings on geopolitical risk to guide macroprudential policy. Which policy response best fits the logic that geopolitical shocks can trigger sudden repricing and funding strain in financial markets?

The best response is to strengthen buffers and liquidity readiness and run stress tests with geopolitical scenarios covering banks and nonbanks. Geopolitical shocks can cause sudden repricing and funding strain, so resilience measures and forward-looking testing are appropriate, while loosening buffers or narrowing scope would weaken defences.

  1. AReduce stress-test frequency to avoid signalling concern
  2. BEncourage buffers and liquidity preparedness, and conduct stress tests that include geopolitical scenarios for banks and nonbank financial institutionsCorrect
  3. CRemove capital buffers to boost lending during tension
  4. DLimit scrutiny to large banks only, as nonbanks cannot transmit shocks

Explanation

Sudden repricing and funding strain call for resilience: adequate capital and liquidity buffers and scenario-based stress testing covering both banks and nonbanks. Removing buffers or excluding nonbanks reduces resilience, and cutting stress testing runs against the forward-looking approach.

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