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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

In the capital impact assessment within a bank's capital planning process, which practice best reflects supervisory expectations regarding the use of capital planning results?

Best practice is to use stress and projection results to guide capital decisions such as dividends, buybacks and acquisitions, while documenting assumptions and limitations. Treating the exercise only as a regulatory filing, or ignoring sensitivity and off-balance-sheet exposures, does not meet supervisory expectations.

  1. AUse stress results to inform decisions on capital actions, such as distributions and acquisitions, and document limitations of the analysisCorrect
  2. BTreat results as purely a regulatory submission with no link to business decisions
  3. CRely solely on a single point estimate of losses without sensitivity analysis
  4. DExclude off-balance-sheet exposures from the assessment to simplify it

Explanation

Supervisors expect capital planning outputs to feed management decisions and to acknowledge model and assumption limitations. Treating the exercise as a compliance task, using one point estimate, or excluding material exposures weakens the process.

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