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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 planning process uses a stress scenario that mirrors only a severe recession in its home market. Management identifies a large exposure to a single counterparty class and to interest rate shifts that the scenario does not stress. What is the most appropriate supervisory-aligned response?

The bank should supplement the generic recession scenario with firm-specific scenarios and sensitivity analyses targeting its identified vulnerabilities, such as counterparty concentration and interest rate risk. Supervisors expect scenarios tailored to the bank's own risk profile, not just a single macroeconomic scenario.

  1. AKeep the scenario because it matches the regulator's baseline
  2. BRemove the exposures from the analysis as they are not in the scenario
  3. CSupplement with firm-specific scenarios and sensitivity analyses that target the identified vulnerabilitiesCorrect
  4. DIncrease the dividend payout to reduce retained exposure

Explanation

Supervisors expect banks to design scenarios reflecting their own risk profile and vulnerabilities rather than relying only on a generic macro scenario. Adding firm-specific scenarios and sensitivities captures concentrations and rate risk. Ignoring them or raising dividends does not address the gap and would reduce capital.

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