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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 internal stress test projects a capital shortfall under a severe scenario. Supervisory expectations for capital planning say the scenario design process should be best described as which of the following?

Scenarios should be tailored to the firm's own business mix, exposures and vulnerabilities, supplementing supervisory scenarios, and the severity should be documented and justified. Relying solely on the supervisory scenario, a single replayed historical crisis, or macro variables alone would miss firm-specific risks.

  1. ABased only on the supervisory scenario, because firm-specific scenarios add no information
  2. BBased on a single historical crisis replicated exactly, to avoid subjective judgment
  3. CTailored to the firm's own business mix and vulnerabilities, in addition to any supervisory scenarios, with documented rationale for severityCorrect
  4. DLimited to macroeconomic variables such as GDP, excluding idiosyncratic events

Explanation

Supervisors expect firms to design internal scenarios reflecting their specific risk profile and vulnerabilities, including idiosyncratic events, with justification of severity. Relying only on the supervisory scenario or one replayed historical event misses firm-specific risks.

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