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FRM Part I · FRM Exam Part I · Stress Testing

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

The EBA exercise relies on a common methodology and scenarios provided by supervisors, with banks making constrained bottom-up projections under a static balance sheet assumption. Bank-level results are published for market discipline. It does not let banks freely alter their business mix or assume new capital raises.

  1. ABanks run the exercise using their own internal models and scenarios with no common constraints, and results are never published
  2. BBanks project results using a common methodology and supervisor-provided scenarios, with a static balance sheet assumption, and results are disclosed bank by bankCorrect
  3. COnly the supervisor runs the models, and banks submit no data
  4. DThe test assumes banks can freely change their business mix and raise capital in response to the shock

Explanation

The EBA stress test uses a common methodology, constrained bottom-up projections by banks, and scenarios provided by the authorities, with a static balance sheet assumption. Results are published at bank level to promote market discipline. Dynamic balance sheet and management actions are generally not allowed.

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