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 designing the risk identification step of its capital planning process. Which approach best reflects supervisory expectations for identifying risks that could affect capital adequacy?
The best approach is a comprehensive, forward-looking identification process covering all business lines and firm-specific risks, including those not fully captured by regulatory capital models. Relying only on regulatory minimums, past losses, or unaggregated business-line views would miss emerging or concentrated risks that affect capital adequacy.
- ARely solely on risks already captured in regulatory minimum capital requirements
- BUse a comprehensive, forward-looking process that covers firm-specific risks across all business lines, including those not fully captured by regulatory modelsCorrect
- CLimit identification to risks that have produced losses in the past five years
- DDelegate identification to each business line without any enterprise-level aggregation
Explanation
Supervisory expectations call for a comprehensive, forward-looking identification of risks specific to the firm's business mix, including those poorly captured by regulatory capital models. Relying only on regulatory requirements or past losses omits emerging and idiosyncratic exposures. Lack of enterprise-level aggregation prevents a view of combined capital impact.
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