Skip to content

FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice

During stress testing, a bank assumes that it can maintain its planned balance sheet growth and continue to raise new capital at normal prices throughout a severe downturn. Supervisors would most likely criticize this because it

Supervisors would object because capital markets may be closed or very costly during severe stress, so assuming normal access and growth is unrealistic. Management action assumptions must be credible, supportable and consistent with the scenario.

  1. AIgnores that capital markets may be closed or costly in stress, so management actions must be realistic and supportableCorrect
  2. BOverstates the losses the bank would suffer in the scenario
  3. CViolates the requirement to use only one scenario
  4. DApplies a risk-weighted asset measure instead of a leverage measure

Explanation

Supervisors expect assumptions about management actions and capital access in stress to be realistic and well documented. Assuming normal market access during a severe downturn is optimistic and understates capital shortfalls. It does not overstate losses, and the other options are unrelated.

Did you get it right without looking?

One question tells you little. A timed set on Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice shows your real accuracy, how long you take and where you lose marks.

Practise Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current PracticeFree diagnostic mock

More Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice questions