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Risk analysts at a large bank have been asked to implement a stress testing procedure for a newly mandated regulatory stress test. The stress test requires that the bank project its revenues, losses, and capital ratios for each 3-month period over a 2-year horizon. Which of the following actions or assumptions should the analysts recommend for the stress test that is consistent with best practices?
A
Use a full-revaluation approach to model the bank's complex derivative exposures.
B
Use minimum required regulatory capital ratios as the initial trigger for potential contingency capital actions to be taken.
C
Assume that the bank will exit its riskiest lines of business and reduce its expenses during the stress test horizon period.
D
Model the loss given default of the bank's loan portfolio using a weighted-average approach at the aggregate portfolio level.