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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 planning team must project net income over a nine-quarter stress horizon. Supervisory expectations for capital planning practice say that, for loss estimation, the bank should place most emphasis on which approach?

The bank should estimate losses by segmenting portfolios and using risk drivers tied to the macroeconomic stress scenario variables. This makes projections sensitive to the scenario. A uniform historical average, pure judgment, or regulatory minimums would not capture how losses respond to stress.

  1. AUsing a single historical average loss rate applied uniformly to all portfolios
  2. BEstimating losses at a segmented portfolio level using risk drivers that link to the stress scenario variablesCorrect
  3. CRelying only on management judgment without quantitative models
  4. DUsing regulatory minimum capital requirements as the loss forecast

Explanation

Supervisory expectations call for loss estimates that are sensitive to scenario variables and built on risk-segmented portfolios. A single average rate ignores scenario linkage, pure judgment lacks transparency, and regulatory minimums are not loss forecasts.

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