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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 supervisor reviewing the capital plans of several large bank holding companies finds that one firm's stress scenarios mostly replicate the supervisory scenario and contain no risks specific to the firm's own business model. Which weakness does this most directly represent?

The weakness is scenario design that is not tailored to the firm's own vulnerabilities. Supervisors expect stress scenarios to capture the bank's specific business model risks, not merely copy a generic or supervisory macro scenario, otherwise material firm-specific exposures remain untested in capital planning.

  1. AExcessive reliance on tier 1 common capital as the sole capital measure
  2. BScenario design that is not tailored to the firm's own vulnerabilitiesCorrect
  3. COverly frequent board reporting of capital ratios
  4. DUse of a planning horizon longer than nine quarters

Explanation

Supervisory expectations call for firms to design scenarios reflecting their own idiosyncratic risks and vulnerabilities, not just adopt a generic macro scenario. A firm that copies a generic scenario fails this expectation. The other options are not weaknesses described here: frequent reporting and a longer horizon are not deficiencies, and focusing on common equity is consistent with expectations.

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