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

A bank's treasurer is designing the liquidity stress testing program to align with supervisory expectations. Which approach best reflects the expectation that stress tests should inform decision-making rather than serve as a compliance exercise?

Stress test results should feed into limits, liquidity buffer calibration and the contingency funding plan. Supervisors want tests embedded in management decisions, not performed once a year only to file with the regulator or built solely from past events.

  1. ARun a single severe scenario annually and file the results with the regulator
  2. BUse stress test results to set limits, calibrate the liquidity buffer and update the contingency funding planCorrect
  3. CLimit scenarios to historical events that the bank has already survived
  4. DDelegate scenario design entirely to the business lines that manage funding

Explanation

Supervisors expect stress test outputs to be integrated into limit setting, buffer sizing, strategic planning and contingency funding plans. A single annual filing is compliance-driven, historical-only scenarios miss new vulnerabilities, and business-line-only design lacks independence and challenge.

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