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FRM Part II · FRM Exam Part II · Liquidity Risk Reporting and Stress Testing

When setting the stress scenarios used to calibrate a bank's survival horizon target and CFP, which approach is most consistent with sound practice?

Sound practice is to use multiple scenarios, covering idiosyncratic, market-wide and combined stresses at varying severity and duration, with differentiated behavioral assumptions reviewed regularly. Relying on one past event, uniform run-off rates or assumed unlimited central bank support understates risk and weakens the survival horizon estimate.

  1. AUse multiple scenarios, including idiosyncratic, market-wide and combined events, with varied severity and duration, and review assumptions regularlyCorrect
  2. BUse only the most recent historical funding shock as the single scenario
  3. CAssume that central bank facilities are always available at no cost and without limit
  4. DApply identical run-off rates to all funding sources regardless of counterparty type

Explanation

Sound practice uses a range of scenarios, covering bank-specific, market-wide and combined stresses, with differentiated run-off assumptions by funding type, and reviews them regularly. Single-scenario, uniform run-off or unlimited central bank access assumptions are unrealistic.

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