FRM Part I · FRM Exam Part I · Stress Testing
An EBA-style EU-wide stress test applies a static balance sheet assumption. Which consequence follows for the bank's projections?
Under a static balance sheet assumption, the bank's assets and liabilities stay constant in size and composition, with maturing positions replaced by similar ones. Projections therefore exclude management actions such as deleveraging or business plan growth, which keeps results comparable across banks.
- AAssets and liabilities are assumed to remain constant in size and composition, with maturing exposures replaced by similar ones, so management actions to deleverage are not reflectedCorrect
- BThe bank may sell risky assets freely to reduce RWA during the scenario
- CNet interest income is excluded from the projections
- DBalance sheet growth follows the bank's own business plan
Explanation
A static balance sheet holds size and composition fixed and replaces maturing items with similar ones. This prevents banks from improving results through assumed deleveraging or business changes. Options B and D describe dynamic balance sheets.
Did you get it right without looking?
One question tells you little. A timed set on Stress Testing shows your real accuracy, how long you take and where you lose marks.
More Stress Testing questions
- Which statement best describes a key difference between the Federal Reserve's CCAR and the DFAST exercise in the United States?
- Regulators ask a bank to identify the combination of events that would cause its capital ratio to fall below the regulatory minimum, startin…
- A risk manager notes that the firm's stress scenarios shock each risk factor independently by large amounts, but ignore how the shocks would…
- A bank's stress testing framework is criticised by an internal audit review. Which of the following findings would be the most serious gover…
- A bank runs a reverse stress test. Which description correctly characterizes it and its main use in risk management?
- A bank's stress test shows that a severe scenario would reduce its CET1 ratio from 12.0% to 8.5%. Its internal risk appetite sets a manageme…