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

After a near-miss in which a rapid rise in funding costs coincided with credit losses and a cyber incident, the CRO of a bank wants to improve the ERM framework's ability to capture such combined events. Which action is most appropriate?

The CRO should develop integrated stress scenarios that jointly shock several risk types and reflect interdependencies and feedback effects. Adding separate stress results ignores interactions, historical VaR misses unprecedented combinations, and less frequent reporting would weaken management's ability to detect and respond to such events.

  1. ARely on separate stress tests for each risk type and add the results to get a total
  2. BEliminate scenario analysis, because historical VaR already captures all combined events
  3. CDevelop integrated stress scenarios that jointly shock multiple risk types and consider feedback effects and risk interdependenciesCorrect
  4. DReduce the frequency of risk reporting to avoid reacting to short-term noise

Explanation

Integrated scenarios that jointly shock several risk types and capture interactions address the observed combined event. Summing separate stress results ignores interactions and feedback, and historical VaR cannot capture unprecedented combinations. Less frequent reporting weakens oversight.

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