The aggregation of stress test results for individual exposures would indeed result in an overestimation of potential losses. This is because the aggregate result assumes a scenario where every counterparty defaults, which is highly unlikely in real-world situations. Even in severe financial crises, not all counterparties would default at the same time. Therefore, the aggregated results would not provide a realistic estimate of potential losses, making them irrelevant for practical risk management purposes. It’s important to note that stress testing is a valuable tool for assessing individual exposures, but its usefulness diminishes when used for aggregate exposures due to the unrealistic assumptions involved.

Choice B is incorrect. While aggregated results may provide a broad view of exposure, they do not necessarily represent the maximum exposure. This is because they assume that all counterparties would default simultaneously, which is an unlikely scenario in reality.

Choice C is incorrect. Aggregated stress test results cannot effectively simulate a global crisis like that of 2007/2008. Such crises involve complex interactions and dependencies among various financial institutions and markets, which cannot be captured by simply aggregating individual stress test results.

Choice D is incorrect. The statement that such results would ignore individual counterparties’ risks is inaccurate. Aggregated stress tests do consider individual counterparty risks but the issue lies in the assumption of simultaneous default by all counterparties, which exaggerates potential losses.

Things to Remember

• Aggregation of stress test results for individual exposures to create an overall stressed