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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

Under supervisory expectations for stress testing counterparty credit risk, which feature is most important for a bank's stress testing program to support the identification of risk concentrations across counterparties?

The program should aggregate exposures across the firm by counterparty and by common risk factors, including at group level. Concentrations arise from shared drivers across counterparties, so isolated, single-factor or threshold-only tests would miss correlated vulnerabilities that stress testing is meant to reveal.

  1. AEvaluating each counterparty independently using its own rating history
  2. BAggregating exposures across the bank by counterparty and by common risk factors, including on a legal entity and group basisCorrect
  3. CRelying on a single-factor scenario applied equally to all counterparties
  4. DTesting only counterparties whose exposures exceed the regulatory large exposure threshold

Explanation

Identifying concentrations requires an integrated, firmwide view of exposure by counterparty and by shared risk factors. Assessing counterparties in isolation misses common drivers, and single-factor or threshold-based testing is too narrow to capture correlated vulnerabilities.

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