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FRM Part II · FRM Exam Part II

Contingency Funding Planning for FRM Part II

A contingency funding plan (CFP) is a documented set of actions a bank will take to meet its cash needs in a liquidity stress. To solve questions, identify the stress type, check early warning indicators, size the funding gap under the scenario, and match it to available sources and the right governance step.

What this chapter covers

Contingency Funding Planning sits in the Liquidity and Treasury Risk Measurement and Management topic of FRM Part II. It asks one practical question: if funding dries up, what exactly will the bank do, who decides, and how much cash can it raise in time?

The chapter moves from the plan itself to the triggers that activate it, then to the stress tests that size the problem. After that it covers the sources of funds and buffers that fill the gap, the governance that runs the response, and finally the lessons from past crises and regulatory guidance.

It links closely to the rest of the liquidity material: liquidity risk measures, the Basel liquidity standards such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, funding structure, and central bank facilities. It also connects to operational risk and resilience, because a crisis response depends on people, systems and communication, and to Current Issues, where market stress and digital runs are discussed.

The exam has 80 equally weighted multiple-choice questions, and liquidity questions are often applied and case-like. This chapter gives you the logic that ties those questions together: stress, trigger, gap, source, decision. If you understand that chain, you can answer scenario questions even when the wording is new. It also rewards precise use of terms, which is where many candidates lose easy marks. The ideas are mostly conceptual, so they are quick to revise and hold well under time pressure.

Contingency Funding Planning: topics in the order to study them

  1. 1Contingency Funding Plan (CFP) Basics and ObjectivesStart here to learn what a CFP is, what it must contain and how it differs from day-to-day liquidity management.
  2. 2Liquidity Stress Events and Early Warning IndicatorsNext, learn what kinds of stress the plan responds to and which signals trigger it.
  3. 3Stress Testing and Scenario Analysis for LiquidityOnce you know the events, you learn how to size the funding gap under idiosyncratic, market-wide and combined scenarios.
  4. 4Contingent Funding Sources and Liquidity BuffersWith the gap sized, you study what can cover it, and how quickly and reliably each source works.
  5. 5Governance, Roles and Crisis Management ProceduresThen you add who decides, who escalates and how the bank communicates, which turns the plan into action.
  6. 6Lessons from Liquidity Crises and Regulatory GuidanceFinish with real failures and supervisory expectations, which let you test everything above against cases.

How to prepare Contingency Funding Planning

This chapter is mostly conceptual, so aim to understand the logic and the exact terms rather than memorise lists.

  1. Read the six topics in the order above and write a one-line summary of each in your own words.
  2. Draw one flow on a single page: warning indicator, trigger, escalation, stress sizing, funding action, communication. Redraw it from memory.
  3. Separate idiosyncratic stress from market-wide stress and learn how each changes the available sources and the scenario assumptions.
  4. Compare funding sources by speed, reliability and cost. Note which assets are unencumbered and which are eligible for central bank facilities.
  5. Practise short scenario questions: read the stem, name the stress type, state the indicator or action, then check each option for conditions that make it wrong.
  6. Link the chapter to Basel liquidity standards such as LCR and NSFR, and to historic failures, so you can recognise them in case questions.
  7. In the last week, redo only the questions you got wrong and recite the quick revision points.

Common mistakes in Contingency Funding Planning

  • Treating the CFP as the same thing as liquidity risk measurement

    Fix: Remember that measurement tells you the exposure, while the CFP tells you what actions you take when stress hits.

  • Assuming all assets in the buffer are available in a crisis

    Fix: Check whether the asset is unencumbered, eligible and sellable in the stressed market, and apply the stated haircut.

  • Mixing up idiosyncratic and market-wide stress

    Fix: Ask whether the problem is specific to the firm or shared by the market, then choose sources and assumptions to match.

  • Relying on a single funding source in a scenario answer

    Fix: Prefer answers that show diversification and tested access, since concentration is a recurring lesson from crises.

  • Ignoring governance and communication

    Fix: Learn who escalates, who decides and who communicates. Exam options often turn on these roles.

  • Stating regulatory rules loosely

    Fix: Tie each measure to its purpose and time horizon, and state it exactly as the reading presents it.

Last-day revision: Contingency Funding Planning

  • A CFP is a plan of actions for liquidity stress, not a daily cash forecast.
  • A good CFP sets out triggers, responsibilities, funding sources, and communication steps.
  • Early warning indicators include falling deposits, rising funding costs, widening spreads and credit rating pressure.
  • Idiosyncratic stress hits one firm; market-wide stress hits many firms and lowers asset liquidity.
  • Combined scenarios are the most severe and usually the most useful for planning.
  • Liquidity stress tests should use assumptions on run-off, haircuts and loss of market access.
  • Liquidity buffers should be unencumbered and quickly convertible to cash.
  • Contingent sources include asset sales, repo, committed lines and central bank facilities, each with limits.
  • Central bank borrowing can carry stigma and needs eligible collateral to be pre-positioned.
  • Governance needs clear ownership, senior management escalation and board oversight.
  • Communication with regulators, markets and customers is part of the plan.
  • Past crises showed that funding concentration and reliance on short-term wholesale funding amplify stress.

Contingency Funding Planning practice questions

Contingency Funding Planning in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contingency Funding Planning: frequently asked questions

What is a contingency funding plan in FRM Part II?

It is a documented plan that sets out how a bank will meet its funding needs in a liquidity stress. It covers triggers, funding sources, roles and communication.

Is this chapter calculation-heavy?

Mostly no. You may size a funding gap or apply haircuts and run-off rates in a scenario, but the main marks come from concepts, definitions and applying them to cases.

How does this chapter link to the Basel liquidity ratios?

The LCR and NSFR set minimum standards for liquidity buffers and stable funding. The CFP covers what you do when stress goes beyond what those ratios cover.

How should I revise this chapter quickly?

Redraw the flow from warning indicators to funding actions and governance, then review your wrong answers. Finish with the quick revision list.