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FRM Part I · FRM Exam Part I · Stress Testing

Under the EBA EU-wide stress test methodology, which feature most distinguishes it from the Federal Reserve's supervisory stress tests?

The EBA test is largely bottom-up: banks project outcomes using their own models under a common methodology and scenario, then national and EU supervisors challenge and benchmark the results. In contrast, the Federal Reserve's supervisory test relies on the regulator's own models run centrally.

  1. ABanks use their own internal models to project results under a common scenario and methodology, with results then challenged by supervisors using constraints and benchmarks, rather than the regulator running all models itselfCorrect
  2. BThe regulator alone runs all projections using its own models, and banks submit only starting balance sheets
  3. CThe test uses no adverse scenario and relies only on historical data
  4. DThe test applies only to a single country's banks and ignores the balance sheet being static

Explanation

The EBA test is largely bottom-up: banks apply a common methodology and scenario with their own models, subject to constraints and supervisory review. The Fed's DFAST supervisory exercise instead uses the regulator's own models. The other options misstate the scope and design.

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