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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's capital plan relies on a single baseline economic scenario provided by its business lines, with only a mild adverse case added for completeness. Supervisors reviewing the plan would most likely criticize which weakness?

Supervisors would criticize scenarios that are mild and not tailored to the firm's own vulnerabilities. Capital planning must test severe but plausible stresses specific to the firm's risk profile; a generic, mild adverse case understates potential losses and undermines the credibility of the capital plan.

  1. AStress scenarios not tailored to the firm's own vulnerabilities and not sufficiently severeCorrect
  2. BUse of internal models to project losses
  3. CReporting capital ratios on a quarterly basis
  4. DHaving a board committee review the plan

Explanation

Supervisory expectations call for scenarios that reflect the firm's specific risk profile and are adverse enough to be meaningful. A mild generic scenario understates potential losses. The other options describe normal or desirable practices.

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