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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 large bank holding company is building its stress-scenario loss forecasts for a portfolio of credit card receivables. Supervisory expectations for capital planning favor a loss estimation approach that does which of the following?

Loss estimates should be linked to the macroeconomic variables in the stress scenario and supported by documented empirical relationships. Reusing last year's loss rate, relying on unsupported judgment, or applying one rate to all portfolios fails to reflect scenario sensitivity and portfolio-specific risk.

  1. ALinks projected losses to the macroeconomic variables in the stress scenario, and supports the link with documented empirical relationshipsCorrect
  2. BApplies the previous year's actual loss rate unchanged across all scenarios for simplicity
  3. CRelies only on management's judgment, with no quantitative analysis
  4. DUses a single enterprise-wide loss rate applied equally to all portfolios regardless of risk

Explanation

Supervisory expectations call for loss estimates that are sensitive to the scenario's macroeconomic conditions and for methodologies that are well supported and documented. A constant historical rate ignores the scenario, pure judgment lacks support, and a single rate ignores portfolio-level risk differences.

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