504.1. According to the Principles for sound stress testing practices and supervision by BIS,
when is stress testing especially important?
a) When new regulations such as Basel III or Dodd-Frank are introduced and implemented
b) During periods of expansion or long periods of benign economic and financial conditions
c) During a corporate transaction such as a merger, especially if key executive roles are
changing
d) Immediately after a market crisis because the standard models will be less useful when
systemic input assumptions are depressed
504.2. About stress testing methodologies, BIS writes, "Stress tests cover a range of
methodologies. Complexity can vary, ranging from simple sensitivity tests to complex stress
tests, which aim to assess the impact of a severe macroeconomic stress event on measures
like earnings and economic capital. Stress tests may be performed at varying degrees of
aggregation, from the level of an individual instrument up to the institutional level. Stress tests
are performed for different risk types including market, credit, operational and liquidity risk.
Notwithstanding this wide range of methodologies, the crisis has highlighted several
methodological weaknesses." According to BIS, which were the primary WEAKNESSES of
stress testing methodologies during the crisis?
a) Most models relied on historical statistical relationship and insufficiently aggregated risks
across the firm, often due to infrastructure limitations
b) Too many scenarios were overly complex such that participants often did not understand
the output; and the output was not communicated in an easy-to-understand manner
c) Due to lack of general quantitative aptitude at the executive level, too often the
subjective or qualitative judgment of so-called experts was utilized instead of objective
data
d) Scenarios tended to emphasize extremely severe market events, sometimes
exaggerated beyond all realism, and therefore ironically ignored more plausible but
mundane scenarios
504.3. When developing a stress testing program, according to BIS, each of the following
elements or component is essential EXCEPT which is not?
a) Reverse stress test
b) System-side interactions and feedback effects
c) Rigorously estimated ex ante probabilities of stress events based on statistical
relationships