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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 designing the stress scenarios for its internal capital planning process. Which approach best reflects supervisory expectations for scenario design?

Firms should build scenarios tailored to their own material risks and vulnerabilities, supplementing any supervisory scenarios. Relying only on regulator scenarios, past recessions or macro variables would miss idiosyncratic exposures that could threaten the firm's capital adequacy.

  1. AUse only the supervisory baseline and severely adverse scenarios, since these are already calibrated by the regulator
  2. BBuild scenarios tailored to the firm's own material risks and vulnerabilities, in addition to any supervisory scenariosCorrect
  3. CSelect scenarios solely on the basis of historical losses from the most recent recession
  4. DLimit scenarios to macroeconomic variables, excluding firm-specific events

Explanation

Supervisory expectations call for firms to design scenarios that reflect their own business mix, risk profile and vulnerabilities, rather than relying only on regulator-provided scenarios. Using only supervisory scenarios or only history would miss idiosyncratic risks. Restricting to macro variables ignores firm-specific stress events.

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