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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 practice best aligns with supervisory expectations for projecting noninterest expenses in a stress scenario?

Banks should project expenses with scenario-driven items in mind, such as higher collection and workout costs, and should assume only realistic, supportable cost-cutting actions. Holding expenses flat, assuming proportional declines, or excluding operational and litigation costs ignores how expenses behave under stress.

  1. AHolding all expenses flat because they are controllable
  2. BAssuming expenses automatically fall in proportion to revenue declines
  3. CExcluding litigation and operational-loss related costs because they are unpredictable
  4. DConsidering scenario-driven expense items, such as higher collection and workout costs and any realistic limits on management cost-cutting actionsCorrect

Explanation

Expenses in stress may rise, for example collections, foreclosure and litigation costs, and management actions to cut costs must be realistic and supportable. Flat or automatically proportional expenses and excluding operational losses ignore scenario effects.

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