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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 uses a model to project pre-provision net revenue under stress. Validation finds the model was developed on a data period without a severe downturn, and management applies no overlay or adjustment. Which action best addresses the weakness consistent with supervisory expectations for capital planning?

The firm should document the limitation, apply conservative overlays or adjustments, run sensitivity analysis and ensure effective challenge. A model built without severe-downturn data may understate stress behavior, and good in-sample fit does not remedy that, while abandoning quantification would further weaken the capital plan.

  1. AAccept the model because it fits the historical data well
  2. BDocument the limitation, apply conservative adjustments or overlays, perform sensitivity analysis, and subject the model to effective challengeCorrect
  3. CReplace all quantitative estimates with qualitative judgment only
  4. DRemove the revenue projection from the capital plan

Explanation

Models lacking stress-period data have known limitations that should be recognized and compensated through overlays, sensitivity analysis and independent challenge. Good fit in benign data says little about stress behavior. Dropping quantification or revenue projections would weaken the plan.

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