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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's capital plan shows adequate capital under its baseline scenario, but its stress scenario assumes only a mild recession that mirrors recent mild downturns. Supervisors criticize it. Which is the most appropriate reason?

The scenario is too mild and generic. Supervisors expect stress scenarios tailored to the bank's own vulnerabilities and severe but plausible, rather than mirroring recent mild downturns. Supervisory scenarios complement, not replace, internal ones, and stress must cover revenues and all material risks.

  1. AStress scenarios should reflect the bank's specific vulnerabilities and be severe yet plausible, not just historical mild eventsCorrect
  2. BStress scenarios must use only supervisory-provided scenarios and never internal ones
  3. CBaseline results should be disregarded in capital planning
  4. DStress scenarios need to cover only credit losses, not revenue or operational risk

Explanation

Supervisors expect internal scenarios to be tailored to the firm's risk profile and business model and to be adverse enough to capture severe but plausible outcomes. Supervisory scenarios supplement rather than replace internal ones. Baseline remains relevant, and stress must cover revenue and all material risks, not just credit.

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