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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

Following a supervisory review, a bank is told its liquidity stress testing results must feed into governance. Which action best reflects supervisory expectations on use of stress test results?

Results should inform the risk appetite, liquidity limits, contingency funding plan and strategic decisions, with senior management and board oversight. Treating stress testing as a filing exercise or limiting it to the treasury desk fails supervisory expectations that results drive governance and management actions.

  1. AReport results only to the treasury desk to avoid confusing the board
  2. BUse results to inform the risk appetite, liquidity limits, contingency funding plan and strategic decisions, with senior management and board oversightCorrect
  3. CRun stress tests annually and file results without further action
  4. DReplace all internal liquidity limits with the regulatory ratio output

Explanation

Supervisory guidance expects stress test results to be integrated into risk appetite, limit setting, contingency funding planning and business strategy, with senior management and board involvement. Filing results without action or restricting them to treasury defeats their purpose.

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