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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 drafting its internal capital policy. Which element is most consistent with supervisory expectations for a capital policy under the Federal Reserve's capital planning guidance?

A sound capital policy sets capital goals and targets, defines triggers and management actions if capital falls below them, and is approved by the board. Relying only on regulatory minimums, treasury-only approval or dividends detached from stress losses fails supervisory expectations.

  1. AA set of capital goals and targets, with triggers and actions for when capital falls below them, and approval by the boardCorrect
  2. BA single regulatory minimum ratio with no internal buffers above it
  3. CA policy approved only by the treasury function and reviewed when regulations change
  4. DA policy that sets dividend payments independent of projected losses under stress

Explanation

Supervisory expectations call for a capital policy that sets goals and targets, specifies triggers and escalation actions, and is reviewed and approved by the board. A policy limited to the regulatory minimum ignores internal buffers, and treasury-only approval lacks board oversight. Setting dividends without regard to stress losses contradicts the link between capital actions and risk.

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