Explanation:
The Federal Reserve expects BHCs to clearly document their key methodologies and assumptions used to estimate losses, revenues, and expenses. BHCs with stronger practices provided documentation that concisely explained methodologies, with relevant macroeconomic or other risk drivers, and demonstrated relationships between these drivers and estimates. Documentation should clearly delineate among model outputs, qualitative overlays to model outputs, and purely qualitative estimates. BHCs with weaker practices often had limited documentation that was poorly organized and that relied heavily on subjective management judgment for key model inputs with limited empirical support for and documentation of these adjustments.
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Q.2230 Clayton bank forms part of a Bank Holding Company (BHC) and has been requested, by the Federal Reserve, to compile documentation regarding its estimation practices. What are the main guidelines that should be followed by the bank while documenting its estimates?
A
Extremely detailed explanations of key methodologies with every bit of data available being presented.
B
Limited documentation emphasizing the importance of management’s judgments in estimates.
C
Limited documentation encompassing theoretical assumptions and quantitative estimates.
D
Concisely explained key methodologies and assumptions presented in a well-organized manner.
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