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Answer: Incorporate a set of escalation procedures into the bank's contingency plan for its economic capital policy.
**C is correct.** As per the text, "In addition, a capital policy should include governance and escalation protocols that are clear, credible, and actionable in the event an actual or projected capital ratio target is breached." **A is incorrect.** The board of directors should have the responsibility for challenging assumptions in capital models and providing final approval for them. Business unit managers should not have the right to provide final approval for the plan for their business unit, as this is decided by the economic capital group and approved by the board. **B is incorrect.** This method is overly conservative as it ignores diversification benefits. **D is incorrect.** The use of third-party vendor models is not discouraged, but guidelines for banks that use third-party scenarios are provided. Banks are encouraged to tailor these scenarios to their specific risk profiles and unique vulnerabilities, but the guidelines do not say that the use of third-party vendor scenarios be avoided.
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An internal auditor at a large bank is reviewing the bank's economic capital framework to ensure that it meets best practices. The auditor identifies deficiencies in the bank's governance framework as well as the process used to determine the firm-wide economic capital and asks the CRO to suggest corrective actions that conform with best practices. Which of the following actions should the CRO recommend?
A
Require business unit managers to challenge the assumptions for their unit's capital model before providing final approval.
B
Calculate the bank's aggregate economic capital by summing its exposures for different risk types.
C
Incorporate a set of escalation procedures into the bank's contingency plan for its economic capital policy.
D
Discourage the use of macroeconomic scenarios developed by third-party vendors to stress test economic capital models.
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