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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 would a supervisor most likely view as a weakness in a large bank holding company's capital contingency plan within its capital planning process?

Assuming capital raising and asset sales will always be possible at pre-stress prices is the weakness. Under stress, markets may be closed and prices depressed, so contingency actions must be realistic, with credible estimates of capital impact and execution time, rather than optimistic assumptions.

  1. AListing specific, credible actions with estimated capital impact and time needed to execute them
  2. BTriggers tied to defined capital levels that prompt escalation to the board
  3. CAssuming that capital raising and asset sales will always be possible at pre-stress pricesCorrect
  4. DTesting the feasibility of actions under stressed market conditions

Explanation

Contingency actions must be realistic under stress, when markets may be closed and asset prices depressed. Assuming pre-stress prices and guaranteed access overstates capital generated. The other choices are sound practices: specific actions, triggers and feasibility testing.

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