Skip to content

FRM Part II · FRM Exam Part II · Stress Testing Banks

In designing an enterprise-wide stress test, a bank risk manager wants the scenario to capture a sudden loss of market confidence that raises funding costs while asset prices fall. This feature most directly illustrates which design principle for integrated stress testing?

The scenario illustrates modelling the link between solvency and liquidity: capital losses affect funding conditions, and funding stress, such as forced asset sales, feeds back into further losses. Historical-only, identical-shock or no-feedback designs would miss this important interaction.

  1. AUsing historical scenarios only, since hypothetical events cannot be assessed
  2. BModelling the links between solvency and liquidity so capital losses affect funding and funding stress feeds back to lossesCorrect
  3. CApplying identical shocks to every business line regardless of exposures
  4. DExcluding second-round effects to keep the model simple and transparent

Explanation

Integrated stress testing should link capital and liquidity: losses erode confidence and raise funding costs, and forced asset sales at lower prices then generate further losses. Historical-only scenarios, identical shocks and excluding second-round effects would miss this feedback loop.

Did you get it right without looking?

One question tells you little. A timed set on Stress Testing Banks shows your real accuracy, how long you take and where you lose marks.

Practise Stress Testing BanksFree diagnostic mock

More Stress Testing Banks questions