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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

During a review of a bank's capital planning process, the board is asked what role it must play under supervisory expectations. Which is most appropriate?

The board should review and approve the capital plan and its key assumptions, and provide effective challenge informed by an understanding of model and methodology limitations. Delegating entirely to management or reviewing only after a failed stress test does not meet supervisory expectations for governance.

  1. ADelegating all capital planning approval to the treasury department, with notification after submission
  2. BReviewing and approving the capital plan and key assumptions, and challenging results with appropriate understanding of limitationsCorrect
  3. CApproving only the final dividend amount without reviewing stress results
  4. DReviewing the plan only if the firm fails the supervisory stress test

Explanation

Supervisors expect the board to review and approve the capital plan, understand key assumptions and model limitations, and provide effective challenge. Delegating without oversight or reviewing only after a failure falls short of this expectation.

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