Explanation:
The correct answer is D.
Applying a stress test (like an equity market crash) at the counterparty level helps an institution identify specific counterparties whose credit quality or exposure might severely deteriorate under stress conditions. This enables the bank to pinpoint areas of concern and estimate the magnitude of potential losses related to those specific counterparties.
Ultimate access to all questions.
Q.1997 The Bank of Bafisa conducts a stress test where it assumes an equity market crash of 30%. The bank applies a stress test to each of its counterparties. How best would such a stress test benefit the bank?
A
It would allow the bank to set aside sufficient provisions in its balance sheet.
B
The bank would be able to rank all its counterparties in order of risk, from the least risky to the riskiest.
C
The bank would be able to estimate when the next equity crash would occur in the future.
D
The bank would be able to identify the counterparties that would be of concern in such a stress event and estimate potential losses with respect to a counterparty.
No comments yet.