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

During a firmwide stress test, a bank assumes a market shock reduces the value of its securities portfolio. Which of the following represents the most important integrated-risk consideration that a siloed approach would likely omit?

The key omitted consideration is the feedback between risks: market losses reduce capital and collateral value, which widens funding spreads and triggers margin calls, creating liquidity strain. A siloed test measures each effect separately and misses this compounding, whereas an integrated scenario captures the interaction.

  1. AThe securities losses reduce CET1, which at the same time lowers the value of high-quality liquid collateral and triggers wider funding spreads and higher margin callsCorrect
  2. BThe securities losses are measured in the same currency as the credit losses
  3. CThe securities losses can be reported using the same template as operational losses
  4. DThe securities losses are recorded in the trading book rather than the banking book

Explanation

Integrated stress testing captures feedback loops: market losses erode capital, reduce collateral value, raise funding costs and margin calls, and so create liquidity stress. Siloed tests would treat these as separate events. The other options are administrative or accounting details, not risk interactions.

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