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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 preparing its annual capital plan under the Federal Reserve's supervisory expectations. Which of the following best describes the core purpose of the capital plan?

The capital plan is meant to show that the firm can keep operating and lending as a credit intermediary and still meet regulatory capital requirements under stressed conditions, after accounting for planned capital actions such as dividends and buybacks. It does not fix payouts or replace internal stress testing.

  1. ATo show that the firm can continue operating and serve as a credit intermediary under stressed conditions while meeting regulatory capital requirementsCorrect
  2. BTo demonstrate that the firm's dividend payout ratio will remain constant regardless of economic conditions
  3. CTo set the firm's regulatory minimum capital ratios independently of supervisory standards
  4. DTo replace internal stress testing with a single regulatory-prescribed scenario

Explanation

Supervisory expectations require a forward-looking capital plan showing the firm can remain a viable intermediary and meet minimum capital requirements after planned distributions, even under stress. Dividend payouts are not fixed regardless of conditions, firms do not set their own regulatory minimums, and firms must still run internal stress tests in addition to supervisory scenarios.

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