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

Which statement best describes the role of the board and senior management in a bank's liquidity stress testing framework under supervisory expectations?

The board approves the stress testing framework and liquidity risk tolerance, while senior management reviews results and ensures they influence limits, funding strategy and contingency funding plans. Delegating everything to treasury or not using the results in decisions would fall short of supervisory expectations.

  1. AThe board approves the stress testing framework and risk tolerance, and senior management ensures results are reviewed and drive limits, funding strategy and contingency plansCorrect
  2. BThe board delegates all responsibility to the treasury desk and receives results only after a crisis
  3. CSenior management sets scenarios but results are not used in decision making
  4. DOnly the regulator may challenge scenario design and assumptions

Explanation

Supervisory guidance places responsibility on the board for the liquidity risk tolerance and framework, while senior management ensures stress results inform limits, funding and contingency planning. Full delegation to treasury or ignoring results contradicts that. Internal challenge is also expected, not just regulatory challenge.

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