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

A bank's treasury team is designing its liquidity stress test program. Which scenario design is most consistent with sound practice for capturing the full range of liquidity vulnerabilities?

The best design combines idiosyncratic, market-wide and combined scenarios across several severities and time horizons. Each type exposes different funding and asset-liquidity channels, so relying on one scenario or only on past outflows leaves plausible vulnerabilities untested.

  1. ARun only a single severe market-wide scenario, because idiosyncratic events are already covered by it
  2. BRun idiosyncratic, market-wide and combined scenarios at several severities and over several time horizonsCorrect
  3. CRun only an idiosyncratic scenario, because market-wide events cannot be modeled reliably
  4. DRun only scenarios based on the worst historical outflow observed at the bank

Explanation

Sound practice uses idiosyncratic, market-wide and combined scenarios with varying severity and horizons, because each exposes different vulnerabilities. A single scenario misses distinct channels, and history alone ignores plausible events that have not yet occurred.

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