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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 demonstrates effective governance over a bank's stress testing used in capital planning?

Effective governance involves the board and senior management reviewing and challenging scenarios, assumptions and results, and documenting limitations. Stress results should inform capital decisions rather than being ignored or tuned to meet targets.

  1. ASenior management and the board review and challenge scenarios, key assumptions and results, with documented limitationsCorrect
  2. BDelegating all scenario choices to the modeling team without review
  3. CExcluding results from capital decisions to avoid influencing strategy
  4. DChanging assumptions after results are known to meet target ratios

Explanation

Sound governance requires board and senior management engagement, effective challenge of assumptions, and clear documentation of limitations. Delegating without review, ignoring results, or adjusting assumptions to hit targets undermine the process.

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