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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 estimating operational risk losses for capital planning, which approach best reflects supervisory expectations for a large bank holding company?

Banks should combine internal loss history, external data and scenario analysis, and consider how the stress environment could increase operational losses, including legal exposures. A flat prior-year average, excluding litigation, or substituting a regulatory capital charge would not meet supervisory expectations.

  1. AAssume operational losses equal the prior year's average with no scenario adjustment
  2. BCombine historical internal loss data with external data and scenario analysis, and consider links to the stress environmentCorrect
  3. CExclude legal and litigation losses because they are unpredictable
  4. DUse only the standardized capital charge as the loss projection

Explanation

Operational loss projections should use internal and external loss data plus scenario analysis and consider how the stress environment may raise losses. Flat averages, excluding litigation, or using capital charges are not adequate estimates.

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