Skip to content

FRM Part I · FRM Exam Part I · Stress Testing

In supervisory stress tests such as CCAR, why do regulators typically require a bank to assume a static or prescribed balance sheet and prescribed capital actions rather than allowing the bank's own favorable management actions?

Regulators prescribe balance sheet and capital action assumptions so results are comparable across banks and conservative. Allowing banks to assume favorable discretionary management actions, which may be infeasible in a real crisis, could understate the capital shortfall that the stress scenario is designed to reveal.

  1. ATo keep results comparable across banks and avoid understating the capital shortfall through optimistic discretionary responsesCorrect
  2. BTo ensure every bank's capital ratio ends exactly equal
  3. CBecause management actions are illegal during stress periods
  4. DTo eliminate the need for loss projections

Explanation

Prescribed assumptions make results comparable and conservative, preventing banks from relying on uncertain actions such as asset sales or raising capital that may be infeasible in a crisis. The other options are false or irrelevant.

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.

Practise Stress TestingFree diagnostic mock

More Stress Testing questions