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

A bank's treasury team is preparing its internal liquidity stress testing program. Under supervisory expectations for liquidity stress testing, which statement best describes how the bank should select its stress scenarios?

The bank should use a range of scenarios, including institution-specific, market-wide and combined events, at different severities and time horizons. A single scenario or purely historical ones would miss plausible vulnerabilities and would not meet supervisory expectations for comprehensive liquidity stress testing.

  1. AUse only the single regulatory scenario, because internal scenarios cannot be validated by supervisors
  2. BUse a range of scenarios, including institution-specific, market-wide and combined events, at varying severities and time horizonsCorrect
  3. CUse only historical scenarios that have actually occurred at the bank, so results can be verified
  4. DUse only a market-wide scenario, since idiosyncratic events are captured by capital stress tests

Explanation

Supervisory expectations call for stress tests covering idiosyncratic, market-wide and combined scenarios across several severities and horizons. Relying on one regulatory scenario or only historical events leaves plausible but unobserved vulnerabilities untested.

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