FRM Exam Part II · Contingency Funding Planning

Contingency Funding Plan (CFP) Basics and Objectives

Updated 11 October 2026 · Fact-checked

A contingency funding plan (CFP) is a bank's documented plan for meeting cash and collateral needs during a liquidity stress. It sets triggers, funding sources, roles and actions so management can act quickly. It is based on stress scenarios and links to the liquidity buffer, limits and governance.

Understand Contingency Funding Plan (CFP) Basics and Objectives

Every bank borrows short and lends long. If depositors or wholesale lenders pull funding at the same time, the bank can run out of cash even when it is solvent. A contingency funding plan (CFP) is the playbook for that moment.

A CFP is not the same as the liquidity buffer or the stress test. The stress test shows how big the potential shortfall could be. The buffer is the stock of liquid assets held in advance. The CFP says what management does when stress actually starts: who decides, which sources are used first, and what is said to markets, regulators and customers.

The main objectives are to: (1) ensure the bank can meet obligations as they fall due under stress, (2) identify early that stress is emerging, (3) set a clear order of actions and funding sources, (4) assign roles and decision rights, and (5) keep confidence among counterparties through communication.

Typical components are: a governance and crisis team structure; early warning indicators and escalation triggers; stress scenarios (idiosyncratic, market-wide and combined) with cash flow projections; an inventory of contingent funding sources such as asset sales, repo of unencumbered collateral, drawing committed lines and central bank facilities; operational steps for collateral mobilisation; a communication plan; and regular testing and updating.

Supervisors expect a CFP. Basel's sound liquidity principles require a formal CFP that is consistent with the bank's risk tolerance, is based on stress test results, is reviewed regularly and is operationally tested. A CFP that exists only on paper, for example one counting on a central bank facility the bank has never tested access to, is a typical supervisory finding.

Key formulas to remember

Stress funding gap: Stress funding gap = Stressed cash outflows − Stressed cash inflows − Liquidity buffer available; A positive gap must be covered by contingent sources in the CFP. Use post-haircut buffer values.
Survival horizon: Survival horizon = time until cumulative net outflows exhaust the counterbalancing capacity; The CFP should cover at least the horizon used in stress tests.
Core CFP elements: Triggers + Roles + Sources + Actions + Communication + Testing; Use as a checklist to recognise a complete plan.
Cumulative net outflow: Cumulative net outflow(t) = Σ (outflows − inflows) over days 1 to t; Compare with buffer after haircuts to find when it is exhausted.

How to solve Contingency Funding Plan (CFP) Basics and Objectives questions

Use this method for any CFP question, conceptual or numerical.

1Identify what is asked: purpose, component, regulatory expectation, or a funding gap calculation.
2Decide the scenario: idiosyncratic, market-wide or combined. Outflow assumptions differ.
3If numerical, apply haircuts to buffer assets first, then net outflows against inflows.
4Compare cumulative net outflows with the haircut buffer to get the gap or survival horizon.
5List contingent sources to cover any gap, in order of speed and reliability, noting realistic limits.
6Check governance points: triggers, roles, testing, and consistency with risk tolerance.
7Choose the answer that describes action under stress, not prevention or pure measurement.

Quickest way: Three-question CFP screen

When to use it: For conceptual MCQs where options mix up the CFP with buffers, stress tests or capital.

Ask: is this about what to do once stress hits? If yes, it points to the CFP.
Ask: is it measuring the size of stress (stress test) or a stock held beforehand (buffer)? Then it is not the CFP itself.
Eliminate options that rely on untested, unrealistic or stress-correlated sources.

Common mistakes in Contingency Funding Plan (CFP) Basics and Objectives

Treating the CFP as the same thing as the liquidity buffer.
Both deal with crisis liquidity.
Fix: The buffer is a stock of assets. The CFP is the action plan that uses the buffer and other sources.
Thinking a CFP is only for bank-specific problems.
The word contingency suggests a single event.
Fix: A CFP should cover idiosyncratic, market-wide and combined scenarios.
Counting assets at market value in a gap calculation.
Haircuts are skipped under time pressure.
Fix: Apply haircuts to get the realisable value before comparing with outflows.
Assuming central bank access solves the plan.
Central banks are seen as lender of last resort.
Fix: Treat central bank facilities as a last, tested source. Collateral must be pre-positioned and eligible.
Ignoring testing and governance.
Candidates focus on the numbers.
Fix: Remember that regular testing, clear roles and board-level review are core expectations.

Worked examples

Example 1

A bank projects 30-day stressed outflows of $9.0 billion and inflows of $3.5 billion. Its liquid assets are $4.0 billion of cash and $3.0 billion of bonds, with a 20% haircut on the bonds. What is the funding gap the CFP must cover?

Show the solution

Net outflow = 9.0 − 3.5 = $5.5 billion.
Haircut bonds = 3.0 × (1 − 0.20) = $2.4 billion.
Available buffer = 4.0 + 2.4 = $6.4 billion.
Gap = 5.5 − 6.4 = −0.9 billion, so the buffer covers the outflow.

Answer: No gap: the buffer exceeds net outflows by $0.9 billion, so no contingent sources are needed over 30 days in this scenario.

Example 2

Which statement best describes the main purpose of a contingency funding plan? (A) Hold enough high-quality assets to meet the LCR. (B) Estimate the size of potential cash shortfalls. (C) Set out actions, triggers, roles and funding sources to be used when a liquidity stress emerges. (D) Allocate funds transfer pricing charges to business lines.

Show the solution

A describes the buffer requirement, a stock held in advance.
B describes stress testing or cash flow projection.
D describes liquidity transfer pricing.
C describes the response plan, which is the CFP.

Answer: C

Exam tips

Distinguish clearly between CFP, liquidity buffer, stress test and funds transfer pricing. Many wrong options borrow words from the others.
Expect case questions asking what a CFP should include or what is weak in a given plan: look for missing triggers, untested sources, or no ownership.
In numerical items, apply haircuts before netting.
Remember that the CFP should be based on stress test results and reviewed and tested regularly.

Practice questions from Contingency Funding Planning

Contingency Funding Plan (CFP) Basics and Objectives in other exams

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

CMA FinalStress Testing and Contingency Funding Plan

Contingency Funding Plan (CFP) Basics and Objectives: frequently asked questions

What is a contingency funding plan in banking?

It is a documented plan for how a bank will meet its cash and collateral needs during a liquidity stress. It lists triggers, funding sources, roles and communication steps.

Why do banks need a contingency funding plan?

Banks fund long-term assets with short-term liabilities, so funding can disappear quickly. A CFP lets management act in an orderly way, and supervisors expect one under sound liquidity principles.

What are the main components of a CFP?

Governance and crisis team, early warning indicators and triggers, stress scenarios and projections, contingent funding sources, operational procedures, communication plans, and regular testing and review.

How is a CFP different from a liquidity stress test?

A stress test measures how large a shortfall could be under assumed scenarios. The CFP sets out what the bank does about it. The CFP should be built on the stress test results.