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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 notes that one firm's capital plan relies on a single baseline economic forecast and only briefly mentions adverse conditions. Which weakness in current practice does this most directly illustrate?

The weakness is inadequate stress scenario design. Supervisors expect capital plans to be tested against adverse scenarios that reflect the firm's own vulnerabilities, so relying on one baseline forecast with only brief mention of adverse conditions fails to show the firm can remain adequately capitalized under stress.

  1. AInadequate stress scenario design that does not reflect the firm's own specific vulnerabilitiesCorrect
  2. BExcessive reliance on market-based capital measures
  3. COverly frequent board reporting of capital ratios
  4. DUse of too many internal models for loss estimation

Explanation

Supervisory expectations call for capital plans that are tested under stressful scenarios tied to the firm's own risk profile. Relying on a single baseline forecast fails this expectation. The other options describe issues not suggested by the scenario.

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