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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

Which of the following best describes the role of internal audit in a bank holding company's capital planning process?

Internal audit independently assesses whether the capital planning process and its controls are effective and reports findings to the board or audit committee. It does not set capital targets, build models or prepare the plan, because doing so would compromise its independence.

  1. ASetting the capital targets and approving distributions
  2. BDeveloping the stress testing models used for projections
  3. CIndependently assessing the effectiveness of the process and its controls, and reporting findings to the boardCorrect
  4. DPreparing the capital plan on behalf of business lines

Explanation

Internal audit is the independent third line, evaluating whether the capital planning process, governance and controls operate effectively and reporting to the board or its committee. Setting targets is a management and board role, and developing models or preparing the plan would compromise independence.

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