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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 team identifies that its loss estimates rely on a vendor model with limited documentation and few data points for a new loan portfolio. Which response best reflects supervisory expectations for managing this weakness?

The bank should document the model and data limitations, apply conservative adjustments or overlays, and transparently report the resulting uncertainty to senior management and the board. Excluding the portfolio or presenting the figure as precise would understate risk and conflict with sound capital planning governance.

  1. ATreat the output as precise and exclude it from the uncertainty discussion
  2. BRemove the portfolio from the stress test to avoid reporting unreliable numbers
  3. CDocument the limitations, apply conservative adjustments or overlays, and report the uncertainty to senior management and the boardCorrect
  4. DReplace the estimate with the prior year's figure without disclosure

Explanation

Expectations are that firms recognise model and data limitations, compensate with conservative judgmental adjustments, and communicate the resulting uncertainty to decision makers. Excluding the portfolio would understate risk, and ignoring limitations hides the issue.

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