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

Under the EBA EU-wide stress test methodology, which approach is characteristic of how the exercise is run?

The EBA stress test uses a constrained bottom-up approach: banks apply a common methodology and scenario to their own data and models, within constraints, and supervisors challenge and quality-assure the results to keep them comparable.

  1. AA constrained bottom-up approach in which banks use a common methodology and scenario, with results challenged by supervisorsCorrect
  2. BA purely top-down exercise where supervisors alone compute all bank results without bank input
  3. CA fully discretionary bottom-up exercise where each bank chooses its own scenario and assumptions
  4. DA market-based exercise using only equity-implied default probabilities

Explanation

The EBA exercise applies a common scenario and methodology that banks use to run their own models, with constraints and supervisory quality assurance. It is neither purely top-down nor fully discretionary.

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