Explanation:
Statement A is incorrect because the impact of stress tests should not be evaluated against economic profit and loss only. A comprehensive stress testing framework also assesses the impact on accounting profit and loss, capital requirements, and liquidity. Statements B, C, and D are correct principles of an effective stress testing framework according to Basel guidelines.
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Q.33 Which of the following statements regarding stress testing methodologies is incorrect?
A
The impact of stress tests is evaluated against the economic profit and loss only.
B
An appropriate stress testing framework should comprise a broad range of scenarios covering risks at different levels of granularity
C
The stress testing program should explicitly cover complex and bespoke products such as securitized exposures
D
A bank should enhance its stress testing methodologies to capture the effect of reputational risk