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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

Internal audit at a large bank holding company reviews the capital planning process. Which finding would most clearly indicate a weakness in internal controls over capital planning?

The weakness is that the model developers are also the only validators. Capital planning controls require independent review and challenge of models and estimates. Without independence, errors and biases may go undetected, whereas management review, input reconciliation, and documented roles are all signs of good control.

  1. ACapital stress test results are reviewed by senior management before submission to the board
  2. BModel inputs for loss estimation are reconciled to source systems on a documented schedule
  3. CThe same team that develops the loss-forecasting models also performs their sole validation and approves their useCorrect
  4. DPolicies describe the roles and responsibilities of each participant in the process

Explanation

Sound internal controls require independent review and validation of models and estimates used in capital planning. When the developers validate their own models, there is no independence, so the control fails. The other options are examples of good control practice.

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