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FRM Part II · FRM Exam Part II · Integrated Risk Management

A risk manager wants to improve the credibility of a firmwide scenario used for capital planning. Which practice is most consistent with sound scenario governance?

Credible scenario governance requires board and senior management challenge of scenario severity and plausibility, with documented assumptions and clear links between results and management actions. Letting business lines pick favorable scenarios or relying on only one scenario or historical events weakens independence and the ability to capture unprecedented risks.

  1. ALetting business lines select their own scenarios to ensure results are favorable to their plans
  2. BLimiting scenarios to events that occurred in the past 10 years so that all of them are verifiable
  3. CUsing one scenario only, to maintain consistency in year-over-year comparisons
  4. DHaving senior management and the board challenge the scenarios' severity and plausibility, and documenting the assumptions and management actions linked to the resultsCorrect

Explanation

Sound governance requires senior oversight, challenge of severity and plausibility, documentation, and links between results and management actions. Allowing business lines to choose favorable scenarios undermines independence. Restricting scenarios to history or to a single scenario ignores plausible but unprecedented events.

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