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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 an internal audit of a bank holding company's capital planning, the auditor finds that the model used to project pre-provision net revenue was changed by its developer, who also approved the change and updated the production version without independent review. Which control weakness is most directly illustrated?

The finding illustrates inadequate segregation of duties and missing independent model validation. Because the same person developed, approved and deployed the change to a model feeding capital projections, there was no independent challenge or change control, which supervisors expect for models used in capital planning.

  1. AInadequate segregation of duties and independent validation of models used in capital planningCorrect
  2. BExcessive conservatism in scenario design
  3. CInsufficient diversification of capital instruments
  4. DOver-reliance on external credit ratings

Explanation

The developer made, approved and deployed the change, with no independent review. This breaches segregation of duties and the expectation that models feeding capital planning are independently validated and subject to change control. The other options concern different issues unrelated to the facts described.

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