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FRM Part II · FRM Exam Part II · Contingency Funding Planning

Which of the following describes a reverse stress test in the liquidity context?

A reverse stress test starts from a defined adverse outcome, such as exhausting the liquidity buffer or an unviable business model, and works backward to find the scenarios and combinations of shocks that would produce it, thereby revealing vulnerabilities that forward-looking scenarios may miss.

  1. AApplying a standard 30-day regulatory scenario and reporting the resulting ratio
  2. BIdentifying the scenarios or combinations of shocks that would exhaust the bank's liquidity buffer or make its business model unviableCorrect
  3. CRe-running a past stress test with the order of shocks reversed
  4. DTesting only the inflow side of the cash flow ladder

Explanation

A reverse stress test starts from a defined failure outcome, such as buffer depletion, and works backward to identify the shocks that would cause it. This reveals hidden vulnerabilities that forward scenarios may miss. The other options describe forward or unrelated exercises.

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