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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 used in its internal capital planning process. Supervisory expectations for capital planning at large BHCs most strongly support which of the following approaches?

Banks should build scenarios tailored to their own risk profile and vulnerabilities, complementing any supervisory scenarios. Relying only on regulator scenarios or past history can miss firm-specific risks, and a baseline forecast alone does not stress capital adequacy.

  1. ARelying solely on the supervisory scenario because it is set by the regulator
  2. BUsing scenarios tailored to the firm's own risk profile and vulnerabilities, in addition to any supervisory scenariosCorrect
  3. CUsing only historical scenarios that have actually occurred in the past 10 years
  4. DUsing a single baseline forecast with no adverse scenarios to avoid inconsistent results

Explanation

Supervisory expectations call for BHCs to design scenarios reflecting their own business mix, exposures and vulnerabilities, not merely adopt a regulator's scenario. Relying only on the supervisory scenario or only on history leaves firm-specific risks unexamined. A baseline alone does not test capital resilience.

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