FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
A bank holding company's capital plan shows a post-stress tier 1 common ratio comfortably above its minimum. However, examiners observe that the plan assumes the firm continues paying planned dividends and share repurchases at full levels through the stress period, without considering whether management would actually curtail them. What is the most appropriate supervisory view?
Supervisors would want realistic, documented assumptions about distributions and management actions, supported by contingency plans. A passing ratio does not validate assumptions that are unexamined or inconsistent with how management would behave under stress, so the capital action assumptions need justification rather than mechanical treatment.
- AThe plan is acceptable because capital ratios exceed the minimum
- BThe plan should reflect realistic, documented management actions and contingency options, and the assumptions on distributions should be justifiedCorrect
- CThe plan should assume all distributions stop regardless of policy
- DThe plan should ignore capital actions entirely
Explanation
Supervisors expect capital actions assumed in stress to be realistic, consistent with policy and justified, and a contingency plan to be articulated. Simply passing the ratio does not validate unexamined assumptions. Mechanically assuming all actions stop or ignoring them is not the expected approach.
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