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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

A bank's treasury team designs its liquidity stress testing program. The Chief Risk Officer asks who should hold ultimate accountability for approving the stress testing framework, scenario severity and use of results in strategic decisions. Which assignment is most consistent with sound governance practice?

The board and senior management are ultimately accountable for approving the liquidity stress testing framework, scenario severity and how results feed strategy, with independent risk oversight. Delegating this solely to treasury, auditors or business lines creates conflicts of interest or lacks ownership.

  1. AThe board of directors and senior management, with independent risk function oversight of the processCorrect
  2. BThe treasury desk alone, since it executes funding transactions
  3. CThe external auditor, because it is independent of management
  4. DThe front-office business lines, since they generate the exposures

Explanation

Sound governance places accountability for the stress testing framework and the use of results with the board and senior management, supported by independent risk oversight. Treasury alone lacks independence from the funding decisions it makes. External auditors review but do not own the framework, and business lines would face conflicts of interest.

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