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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 its stressed minimum CET1 ratio falls to 6.5% in quarter 7. Its internal policy sets a trigger at 7.0% and the regulatory minimum plus buffer is 7.0%. Which action is most consistent with supervisory expectations for capital planning?

The bank should escalate the breach to the board and activate its pre-defined capital actions, such as cutting distributions or raising capital. A stressed ratio below the policy trigger is a signal to act, not to dismiss the scenario or weaken it.

  1. AEscalate to the board and activate pre-defined capital actions such as reducing distributions, since the trigger is breachedCorrect
  2. BIgnore the result because stress scenarios are hypothetical
  3. CRedefine the stress scenario to be milder so the ratio stays above the trigger
  4. DIncrease planned dividends to signal confidence to the market

Explanation

A breach of the internal trigger in a stress projection should lead to escalation and identified management actions, such as curbing distributions or raising capital. Softening the scenario or raising dividends is contrary to sound practice.

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