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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 capital impact assessment, a bank identifies that its stress results are sensitive to assumed loan loss rates. Which practice best aligns with sound capital planning?

The bank should document its assumptions, test sensitivity to loss rates, and have results independently reviewed and challenged. Favorable assumptions, hiding them from the board, or substituting regulatory minimums would weaken the credibility and governance of the capital assessment.

  1. ADocument assumptions, run sensitivity analysis, and subject results to independent review and challengeCorrect
  2. BUse the most favorable loss rate to avoid triggering capital actions
  3. CKeep assumptions undisclosed to the board to avoid confusion
  4. DReplace loss estimates with the regulatory minimum capital ratio

Explanation

Sound practice requires transparent, documented assumptions, sensitivity testing of key drivers and independent challenge. Choosing favorable rates or hiding assumptions undermines governance, and a regulatory minimum is not a loss estimate.

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