Skip to content

FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks

A bank's EC framework is built by a central risk team. Business-line heads complain that the numbers are a 'black box' and ignore them when making decisions. Which governance response is most consistent with sound practice for embedding EC in management?

The best response is to improve transparency and understanding of the methodology, assumptions and limitations, involving business units in its use. This builds trust and use in decisions, whereas secrecy, a higher confidence level or business-line approval of the model do not fix the governance gap.

  1. AKeep the methodology confidential to preserve model integrity and report only final allocations
  2. BIncrease the confidence level to 99.99% so the numbers appear more conservative
  3. CImprove transparency and senior management understanding of methodology, assumptions and limitations, and involve business units in its useCorrect
  4. DDelegate approval of the EC methodology entirely to the business lines

Explanation

Use in decision-making depends on understanding and trust, so senior management and users need to grasp the assumptions and limits. Opacity worsens the problem, a higher confidence level does not address it, and letting business lines approve the methodology removes independence.

Did you get it right without looking?

One question tells you little. A timed set on Range of Practices and Issues in Economic Capital Frameworks shows your real accuracy, how long you take and where you lose marks.

Practise Range of Practices and Issues in Economic Capital FrameworksFree diagnostic mock

More Range of Practices and Issues in Economic Capital Frameworks questions