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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

Under supervisory expectations for capital planning at large bank holding companies, which statement best describes how a firm should treat its capital policy and capital goals?

A firm should have a board-approved capital policy that sets capital goals and triggers and guides capital actions, such as dividends and buybacks, including when they should be reduced. Setting goals after distributions, excluding the board, or targeting only bare regulatory minimums conflicts with supervisory expectations.

  1. AThe firm should have a board-approved capital policy that sets goals and triggers and guides capital actions such as distributions, including when to reduce themCorrect
  2. BThe firm should set capital goals only after executing planned distributions
  3. CCapital policy is a management matter and should not be shown to the board
  4. DCapital goals should be based solely on the minimum regulatory ratios with no buffer

Explanation

Supervisors expect a formal, board-approved capital policy that defines capital goals, targets and triggers, and governs actions like dividends and repurchases, including contingency actions when capital falls short. Setting goals after distributions or excluding the board contradicts this, and holding only the bare minimum leaves no buffer for stress.

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