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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 risk identification process yields the following inventory. Which of the following is the best example of a risk that supervisors would expect a firm to identify and consider in capital planning even though it is not directly captured in the regulatory capital ratio calculation, and for which the firm should evaluate capital impact under stress?

Loan portfolio concentration, by single name or sector, is the best example. Minimum regulatory capital formulas do not fully reflect it, so supervisors expect the firm to identify it and evaluate its capital impact under stress, unlike credit, market, and operational risks that have explicit regulatory charges.

  1. ACredit risk on its corporate loan book measured under the standardised approach
  2. BA large single-name and sector concentration in its loan portfolioCorrect
  3. CMarket risk on trading positions already covered by the market risk capital rule
  4. DOperational risk already covered by the regulatory operational risk charge

Explanation

Concentration risk is a classic risk not fully captured by minimum capital calculations, so firms must identify it and assess its capital effect under stress. The other options are risks explicitly covered by regulatory capital requirements, although firms should still consider them.

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