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