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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 the risk identification step of its capital planning process. According to supervisory expectations for capital planning, which approach is most consistent with a sound process?

A sound approach identifies material risks across the whole firm, including those not fully captured by regulatory capital models, and then assesses their potential effect on capital. Restricting the process to regulatory minimums or to business lines alone leaves gaps and weakens the capital planning process.

  1. ALimit the process to risks already captured in the regulatory minimum capital requirements
  2. BIdentify material risks firm-wide, including risks not fully captured by regulatory capital models, and assess how they could affect capitalCorrect
  3. CDelegate risk identification to individual business lines without any enterprise-level aggregation
  4. DUpdate the risk inventory only when a new regulatory requirement is issued

Explanation

Supervisory expectations call for a comprehensive, firm-wide identification of material risks, including those not fully covered by regulatory capital rules, and linking them to capital adequacy. Limiting the scope to regulatory minimums leaves out risks such as concentrations or model-related risk, which makes that option wrong.

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