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

Which feature of liquidity stress test governance best reflects supervisory expectations on independent challenge?

Good governance means scenarios and assumptions are documented and independently challenged by senior management and a function outside treasury, with results reported to the board. Self-approval, fixed assumptions or withholding results from the board contradict supervisory expectations.

  1. AScenarios and assumptions are reviewed and challenged by senior management and a function independent of treasury, with documented rationaleCorrect
  2. BTreasury alone approves its own assumptions to preserve confidentiality
  3. CAssumptions remain fixed for three years to ensure comparability
  4. DResults are shared only with the regulator and not with the board

Explanation

Sound governance requires board and senior management oversight, documented assumptions and independent review and challenge. Self-approval, static assumptions and withholding results from the board all weaken governance.

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