Explanation:
The bank should test a wide range of adverse effects reaching outside the established data patterns. Stress testing is a simulation technique used in banking to determine the ability of a financial institution to deal with an economic crisis. Instead of looking at the past performance and expecting the same pattern to continue, the bank should consider a wide range of possible outcomes, including those that are outside of the established data patterns. This is because the future is uncertain and the past performance of the bank may not necessarily indicate its future.
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Q.2229 Fairgrounds Bank forms part of a Bank Holding Company (BHC). The bank has been very successful in a business line that was established about 6 months ago. The bank intends to stress test models for the business line for a longer period. As part of best practice during stress testing, the bank should:
A
Ensure minimal variation from established internal data patterns.
B
Test a wide range of adverse effects reaching outside the established data patterns.
C
Only use the data which reflects the most positive outcomes.
D
Only use the data which reflects the most negative outcomes.