Explanation:
Correct Answer: B
Explanation:
The Federal Reserve generates three supervisor-devised macroeconomic scenarios for DFAST stress testing:
Baseline Scenario: This scenario corresponds to the consensus forecast among major bank economists, which aligns with option B - economic conditions that correspond to the average projections from a survey of economic forecasters.
Adverse Scenario: A moderately declining economy
Severely Adverse Scenario: A severe, broad global recession/depression and an associated decline in demand for long-term fixed-income investment
Why other options are incorrect:
Learning Objective: Explain the use of scenario analysis in stress testing programs and capital planning.
Reference: Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, Chapter 8, Enterprise Risk Management and Future Trends [FRM-8].
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A risk consultant is advising a US-based bank on the Dodd-Frank Act stress tests (DFAST), an annual stress test exercise conducted by the US Federal Reserve (the Fed) for mid-size US banks. The consultant points out that the Fed requires the banks to utilize three supervisor-devised macroeconomic scenarios during the DFAST stress test. Which of the following describes the conditions that one of the supervisor-devised scenarios is designed to simulate?
A
A set of economic variables reflecting the forecast by the Fed's chief economist
B
Economic conditions that correspond to the average projections from a survey of economic forecasters
C
The worst market conditions experienced in a 10-day period during the previous year
D
An economic expansion with an associated rapid increase in demand for real estate investments and fixed-income instruments
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