Skip to content

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

A bank's treasury team is designing its internal liquidity stress testing program in line with supervisory expectations. Which design feature best reflects what supervisors expect of the program?

Supervisors expect liquidity stress tests to cover idiosyncratic, market-wide and combined scenarios, with assumptions reviewed regularly and results feeding contingency funding planning and board oversight. A single historical event or a scenario designed to pass would not reveal vulnerabilities, and restricting results to treasury weakens governance.

  1. AScenarios limited to a single historical bank-specific event to keep results comparable year to year
  2. BScenarios covering both idiosyncratic and market-wide shocks, with assumptions reviewed regularly and results linked to contingency funding planningCorrect
  3. CStress results reported only to the treasury department to avoid unsettling the board
  4. DUse of a single severe scenario calibrated so that the bank always passes its internal limits

Explanation

Supervisors expect a range of scenarios, including idiosyncratic, market-wide and combined shocks, with assumptions regularly reviewed and results feeding the contingency funding plan and risk appetite. Single-event or always-pass scenarios fail to identify vulnerabilities, and restricting reporting to treasury undermines governance.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Risk Reporting and Stress Testing shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Risk Reporting and Stress TestingFree diagnostic mock

More Liquidity Risk Reporting and Stress Testing questions