FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
During a CCAR review, supervisors find that a bank's stress scenarios cover only a severe recession and ignore the bank's largest idiosyncratic exposures, such as a concentrated trading counterparty and a large operational-loss event. Which supervisory expectation is the bank most clearly failing to meet?
The bank is failing to include bank-specific, idiosyncratic risks in its scenario design. Supervisory expectations call for internal scenarios tailored to the firm's own risk profile and vulnerabilities, such as concentrated exposures and operational events, in addition to broad macroeconomic stress scenarios.
- AUsing a single supervisory scenario for all internal analysis
- BIncluding bank-specific, idiosyncratic risks in internal scenario design alongside macroeconomic stressCorrect
- CMaintaining a fixed dividend payout ratio
- DReporting capital ratios only on a point-in-time basis
Explanation
Supervisors expect firms to design internal scenarios that reflect their own risk profile and vulnerabilities, not just generic macroeconomic downturns. Relying only on a recession scenario omits firm-specific risks. The other options are not the expectation at issue; indeed relying on one supervisory scenario would worsen the gap.
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