When banks calculate the losses the institution would incur if an unusual combination of bad events happened,the bank is using the ________ approach.

Question

Quizplus · Accepted Answer

The stress-test approach involves subjecting a bank's portfolio to a variety of stress scenarios, including combinations of bad events, to measure potential losses. This approach helps banks identify vulnerabilities in their risk management practices and ensure they have adequate capital to withstand severe market shocks. The value-at-risk approach, on the other hand, involves estimating the maximum potential loss at a given confidence level over a specified time horizon. The trading-loss and maximum value approaches are not relevant to this question.

When Banks Calculate the Losses the Institution Would Incur If