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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's stress test shows a minimum common equity tier 1 ratio of 7.0% over the nine-quarter horizon. Its internal management buffer policy requires a minimum of 6.5% under stress, and the regulatory minimum is 4.5%. Which conclusion is most consistent with sound capital planning practice?

The firm meets its own 6.5% stress threshold and the 4.5% minimum, but should still challenge scenario severity and model limitations before declaring capital adequate. Passing one scenario does not prove resilience to all, and a decline from the starting ratio is expected.

  1. ACapital is adequate under stress only if it stays above 4.5%, so the buffer policy is irrelevant
  2. BCapital meets the firm's own stress threshold, but the firm should still evaluate the scenario's severity and its model limitations before concluding adequacyCorrect
  3. CThe result proves the firm can withstand any scenario because 7.0% exceeds both thresholds
  4. DThe firm should immediately raise capital because 7.0% is below the pre-stress ratio

Explanation

7.0% exceeds both the 6.5% internal threshold and the 4.5% minimum, but adequacy depends on whether the scenario is severe and relevant and on model limitations. A decline from the starting ratio is expected under stress and does not itself require action. The result is not proof against all scenarios.

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