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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 BHC estimates pre-provision net revenue (PPNR) under stress. Which practice is most consistent with supervisory expectations for revenue and expense projections?

Modeling PPNR components separately, with scenario-specific drivers and justified management actions, is the expected practice. Holding margins or fees flat, using a single asset percentage, or ignoring expenses fails to capture how different revenue and cost lines respond to stress.

  1. AAssume fee income and net interest margin stay at current levels because they are stable in normal conditions
  2. BModel key PPNR components (e.g., net interest income, fee lines, trading revenue, operating expenses) separately, reflecting scenario-specific drivers, and justify any management actionsCorrect
  3. CProject total PPNR as a single fixed percentage of total assets
  4. DExclude operating expense from the projection because it is not scenario sensitive

Explanation

Supervisors expect component-level PPNR projections linked to scenario variables such as rates, volumes and market conditions, with management actions supported and realistic. Flat assumptions or a single ratio hide sensitivities, and expenses (e.g., mortgage servicing, litigation, incentive pay) can change under stress.

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