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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 CCAR capital plan shows strong post-stress ratios, but supervisors object to the submission. The review finds that the stress loss estimates rely on a vendor model that the bank has never validated, the planning assumptions were approved only by the treasury function, and the board received only a summary slide. Which single remedy best addresses the root supervisory concern across these findings?

The best remedy is to strengthen governance and internal controls, including independent validation of models and real board review and challenge of the capital plan. The findings, an unvalidated vendor model, narrow approval and a summary-only board briefing, are all governance weaknesses that supervisors expect to be addressed.

  1. AIncrease the planned dividend to reflect the strong ratios
  2. BStrengthen governance and internal controls, including independent model validation and substantive board review and challenge of the capital planCorrect
  3. CReplace internal estimates entirely with the supervisor's published loss rates
  4. DShorten the planning horizon to reduce estimation uncertainty

Explanation

The findings are all governance and control weaknesses: unvalidated models, narrow approval, and superficial board involvement. Supervisory expectations stress board-level review, independent validation and robust internal controls. Raising dividends worsens the situation, supervisory loss rates do not replace internal processes, and shortening the horizon does not fix governance.

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