Skip to content

FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

A dealer bank's counterparty credit risk stress testing results are produced each quarter by the risk function and then filed without discussion. Which governance change would most directly improve the use of these results in line with supervisory expectations on counterparty stress testing?

The best improvement is senior management and board review of results, with documented actions tied to limits, collateral terms and risk appetite. Stress tests only add value when they influence decisions, and independence from the front office is needed to keep the results credible.

  1. AHave the stress test results reviewed by senior management and the board, with documented actions linked to limits, collateral terms and risk appetiteCorrect
  2. BReduce the frequency of stress tests so that results are more stable over time
  3. CLimit the scenarios to historical events so that they can be easily explained
  4. DMove the stress testing function into the front office so that trading desks own the results

Explanation

Supervisory guidance expects stress test results to feed senior management and board decision-making, including limits, collateral and risk appetite. Reducing frequency or restricting scenarios weakens the program. Front-office ownership creates a conflict of interest and removes independence.

Did you get it right without looking?

One question tells you little. A timed set on The Evolution of Stress Testing Counterparty Exposures shows your real accuracy, how long you take and where you lose marks.

Practise The Evolution of Stress Testing Counterparty ExposuresFree diagnostic mock

More The Evolution of Stress Testing Counterparty Exposures questions