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FRM Part II · FRM Exam Part II · Liquidity Risk Management

In a bank's liquidity stress testing framework, which finding from a reverse stress test would be most useful to senior management?

The most useful finding is the combination of deposit run-off and lost market access that would exhaust the bank's survival horizon. Reverse stress testing begins with the failure outcome and works back to the scenarios causing it, revealing vulnerabilities that average ratios or market VaR would not show.

  1. AThe average daily LCR across the past year
  2. BThe combination of deposit run-off and market-access loss that would exhaust the survival horizonCorrect
  3. CThe historical correlation between equity returns and credit spreads
  4. DThe bank's 99% market VaR for the trading book

Explanation

Reverse stress testing starts from a defined failure outcome, such as liquidity exhaustion, and identifies the scenarios that cause it. The other items are descriptive or market-risk measures and do not identify failure conditions.

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