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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

When assessing the impact of a stress scenario on capital, which approach best reflects supervisory expectations regarding capital actions?

Capital projections should include planned capital actions and any management actions assumed in stress, with those actions shown to be realistic and feasible. Ignoring them, or assuming they change only after a breach, gives a misleading view of resilience.

  1. AAssume planned dividends and repurchases continue unchanged regardless of losses, unless management decides otherwise afterwards
  2. BExclude capital actions from the projection to isolate operating results
  3. CAssume capital actions are cut only after the minimum ratio is breached
  4. DProject capital ratios including planned capital actions, and show management actions that would realistically be taken, with their feasibility supportedCorrect

Explanation

Supervisors expect capital impact assessments to reflect planned capital actions and credible, supported contingency actions. Ignoring actions or assuming they change only after a breach misrepresents capital adequacy.

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