FRM Part II · FRM Exam Part II · Stress Testing Banks
Which practice best supports the governance of a bank's enterprise-wide stress testing program?
Best practice is for the board and senior management to review scenarios, assumptions and results, challenge them, and use the findings in capital planning and strategic decisions. Stress testing that is delegated without challenge or only used for regulatory reporting weakens governance.
- ABoard and senior management review scenarios, key assumptions and results, and use them in capital and strategic decisionsCorrect
- BDelegating all scenario design to the business lines that bear the risk, with no central challenge
- CLimiting use of results to regulatory reporting so they do not affect business decisions
- DUsing only historical scenarios to avoid subjective judgment
Explanation
Sound practice requires active board and senior management involvement, effective challenge, and integration of results into capital planning and strategy. Delegating without challenge, limiting use to compliance, and relying only on historical events are all weaker practices.
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