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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 projects a stressed portfolio of USD 2,000 million exposure at default for a corporate segment. The stressed PD is 6% and stressed LGD is 45%. Management also adds an overlay of 10% of modeled loss for model uncertainty. What is the total projected loss including the overlay?

Total projected loss is USD 59.4 million. Modeled loss is 2,000 million times 6% PD times 45% LGD, which equals 54.0 million, and the 10% overlay for model uncertainty adds 5.4 million, giving 59.4 million.

  1. AUSD 54.0 million
  2. BUSD 59.4 millionCorrect
  3. CUSD 113.4 million
  4. DUSD 65.4 million

Explanation

Modeled loss = 2,000 x 0.06 x 0.45 = 54.0 million. Overlay = 10% of 54.0 = 5.4 million. Total = 59.4 million. Check: 54.0 x 1.10 = 59.4. Option 54.0 omits the overlay; 65.4 wrongly adds 10% of exposure-based 114 mismatch (adds 11.4); 113.4 adds 54 + 59.4.

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