What is the governance structure for stress testing?

Question

AcadiFi · Accepted Answer

Stress testing governance follows a federated model. The board of directors owns the framework at a principles level: risk appetite, tolerance, and key scenarios are approved at the board or board risk committee. The CEO and executive risk committee own execution and sign off on scenario sets, results, and management actions. The CRO organization typically owns the framework, methodology, and aggregated results reporting. Within CRO, a dedicated stress testing team (often 10 to 40 people at a large bank) defines scenarios, runs the cross-risk aggregation, and produces the board deck. Finance owns the balance sheet and revenue projections — the pre-provision net revenue (PPNR) models — and partners with the CFO's FP&A team. Treasury/ALM owns liquidity and funding stress. Business line CROs own desk-level implementations of scenarios. Independent model validation (a separate 2nd-line function under CRO) reviews stress test models annually per SR 11-7. Internal audit (3rd line) reviews process and governance. For regulatory exercises like CCAR/DFAST or EBA EU-wide stress test, additional roles include a program management office, external audit coordination (for PPNR attestation), and a Fed/regulator liaison team. ```mermaid flowchart TD A[Board +
Risk Comm] --> B[Exec Risk
Committee] B --> C[CRO stress
testing team] C --> D[Finance +
Treasury] C --> E[Business
lines] F[Model
Validation] -.->|challenge| C ``` FRM exam: know the three-lines-of-defense structure and that the board approves scenarios.

What is the governance structure for stress testing?

Master Part II with our FRM Course

Related Questions

Practice Questions