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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A US bank holding company with $300 billion in assets is told by its supervisor that its capital plan must be shown to withstand a severely adverse scenario over nine quarters. Which statement best describes the purpose of the supervisory stress test element in the capital plan review?

The supervisory stress test checks whether the bank would stay above minimum capital requirements under a severely adverse scenario after accounting for its planned dividends and buybacks. It is a forward-looking capital adequacy test, not a payout rule, model replacement, or liquidity ratio.

  1. ATo assess whether the firm can maintain capital above minimum requirements after planned distributions under stressed conditionsCorrect
  2. BTo set the bank's dividend payout ratio at a fixed percentage of net income
  3. CTo replace the bank's internal risk models with a single supervisory VaR model
  4. DTo determine the bank's liquidity coverage ratio under normal conditions

Explanation

Supervisory stress testing and capital plan review test whether a firm keeps capital above minimums through a stress horizon after planned capital actions such as dividends and buybacks. It does not fix payout ratios, replace internal models, or measure normal-time liquidity ratios.

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