Skip to content

FRM Part II · FRM Exam Part II · Stress Testing Banks

A supervisor reviewing a bank's stress test finds that projected fee income remains at its pre-stress level even though the scenario includes a deep market downturn. What is the main concern?

The concern is that the bank overstates pre-provision revenue. Fee income from asset management, underwriting and trading usually falls in a deep market downturn, so keeping it flat inflates net income and understates the capital depletion under the scenario.

  1. AFee income is excluded from capital by regulation
  2. BThe bank is likely overstating pre-provision revenue because fee income, such as asset management and trading, is sensitive to market conditionsCorrect
  3. CThe bank is understating its RWA
  4. DThe bank has applied too severe a loss rate

Explanation

Market-sensitive fee lines such as asset management, underwriting and trading typically decline in a downturn. Holding them flat overstates revenue and therefore post-stress capital.

Did you get it right without looking?

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

Practise Stress Testing BanksFree diagnostic mock

More Stress Testing Banks questions