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FRM Part I · FRM Exam Part I · Stress Testing

Under the EU-wide stress test run by the European Banking Authority (EBA), which feature of the methodology most distinguishes it from the Federal Reserve's supervisory stress tests?

The EBA EU-wide stress test is largely bottom-up: banks project results with their own models under a common methodology and constraints, and supervisors then challenge and quality-assure them. This contrasts with the Federal Reserve's approach, in which the regulator runs its own models on bank data.

  1. ABanks run the scenarios using their own models under a common methodology, with constraints, and supervisors then challenge and quality-assure the resultsCorrect
  2. BThe EBA projects all bank results using one central model built entirely by the regulator
  3. CThe EBA test allows banks to assume management actions to offset losses freely
  4. DThe EBA test uses only a single-year horizon with no balance sheet assumptions

Explanation

The EBA exercise is bottom-up: banks apply a common methodology and constraints with their own models, followed by supervisory review and challenge. The Fed's supervisory test relies on the regulator's own models. Typically a static balance sheet assumption applies, and free management actions are not allowed.

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