Banking · Stress Testing
While traditional stress testing evaluates the impact of specific adverse scenarios on an institution's capital, reverse stress testing is uniquely designed to:
- 1identify the specific circumstances or extreme events that would cause the institution's business model to become non-viable or fail.✓
- 2calculate the probability of a specific market crash occurring within a one-year time horizon using historical data.
- 3replace the need for qualitative assessments by relying strictly on quantitative historical volatility measures.
- 4verify that the current Liquidity Coverage Ratio (LCR) exceeds the regulatory minimum under normal market conditions.
Correct answer
identify the specific circumstances or extreme events that would cause the institution's business model to become non-viable or fail.
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