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FRM Exam Part II · Contingency Funding Planning

Contingency Funding Plan Governance, Roles and Crisis Procedures

Updated 11 October 2026 · Fact-checked

A contingency funding plan (CFP) sets out who decides, who acts and who speaks when liquidity comes under stress. Governance means board approval, senior management ownership and independent review. Procedures cover escalation triggers, crisis team roles, stakeholder and regulator communication, and regular testing and updating. Exam answers match the stress level to the right body and action.

Understand Governance, Roles and Crisis Management Procedures

A contingency funding plan (CFP) is the bank's playbook for a liquidity shock. Having liquid assets and funding sources is not enough. In a crisis, decisions must be fast, clear and made by the right people. Governance and procedures supply that structure.

Governance starts at the top. The board approves the liquidity risk appetite and the CFP, and reviews it at least annually. Senior management owns the plan and is accountable for it. Treasury or ALM runs it day to day. Independent risk and internal audit challenge it. Under supervisory guidance, the CFP should be consistent with the bank's stress tests and risk appetite.

Escalation links early warning indicators (EWIs) to action. Each indicator has thresholds. A breach at a low level goes to ALCO or the treasurer for closer monitoring. A higher level activates the crisis management team (CMT). The severest level brings in the CEO and board. Triggers should be quantitative where possible, such as deposit outflows, a spread widening, or a fall in the survival horizon. They should also allow judgement, because not every crisis shows up in the numbers first.

The crisis management team usually includes the CFO or treasurer as lead, the CRO, the head of treasury, the head of operations and payments, legal, compliance, communications and business heads. Each member has a defined role and a named deputy. The team meets at set intervals, keeps a decision log, and tracks cash flows, collateral and available buffers daily or even intraday.

Communication has two directions. Internal messages keep staff, business lines and subsidiaries aligned. External messages go to regulators, central banks, rating agencies, depositors, counterparties and investors. Messages must be consistent, accurate and timely. Regulators should be told early, because supervisors may offer support and expect to hear it from you first. Finally, the plan must be tested (for example through simulations, drills and a test of central bank facility access) and updated after tests, real events, and changes in the business or the market.

Key formulas to remember

Escalation logic
EWI breach → assess severity → pre-set level → matching body and actions
Higher severity means more senior decision makers and wider actions. Triggers are set in advance.
Accountability chain
Board approves → Senior management owns → Treasury executes → Risk and audit challenge
Board does not run the crisis; it sets appetite and oversees. Management and the CMT act.
Plan review cycle
Test → find gaps → update → board approval
Review at least annually and after any material change or real stress event.
Survival horizon
Survival horizon = number of days the bank can meet outflows using its liquid resources under a stress scenario
A shrinking horizon is a common escalation trigger.

How to solve Governance, Roles and Crisis Management Procedures questions

Use this method for any CFP governance or crisis procedure question.

  1. 1Identify what the question tests: governance, escalation, roles, communication or testing.
  2. 2Note the stress level in the case: early warning, moderate stress or severe crisis.
  3. 3Match the level to the right decision maker: treasury or ALCO, then CMT, then CEO and board.
  4. 4Check who owns versus who oversees. The board approves and oversees. Management implements.
  5. 5For communication, ask who needs to know, how early, and whether the message is consistent.
  6. 6For testing, look for realism, link to stress scenarios, documented gaps and follow-up updates.
  7. 7Eliminate options that are slow, vague, delegate to a single person without authority, or hide bad news.
  8. 8Choose the option that is pre-planned, documented and proportionate.

Quickest way: Who, when, what, tell whom

When to use it: Use for case-style MCQs with four plausible actions and limited time.

  1. Who owns this decision? Board sets policy, management acts.
  2. When does it trigger? Prefer pre-set, quantitative triggers.
  3. What is the action? Choose the one tied to the plan.
  4. Tell whom? Regulators and key stakeholders, early and consistently.
  5. Reject answers that skip testing or leave the plan unchanged after a failure.

Common mistakes in Governance, Roles and Crisis Management Procedures

  • Saying the board runs the crisis response day to day.

    Students confuse ultimate accountability with execution.

    Fix: The board approves the CFP and risk appetite and oversees. The CMT and senior management execute.

  • Treating escalation as a purely discretionary call.

    It sounds flexible and sensible.

    Fix: Good plans have defined triggers and levels, with room for judgement on top. Pre-set thresholds avoid delay.

  • Choosing to delay regulator contact until the situation is clearer.

    Students fear alarming the supervisor.

    Fix: Early, honest engagement is expected. Late disclosure damages trust and may limit support.

  • Assuming a plan that exists on paper is adequate.

    Documentation feels like completion.

    Fix: Plans must be tested, including operational steps like accessing central bank facilities and moving collateral, and updated after findings.

  • Giving different messages to different stakeholders.

    Each audience seems to need different detail.

    Fix: Tailor detail but keep facts consistent. Inconsistency fuels rumours and runs.

  • Leaving out subsidiaries and currencies from the plan.

    Students think at group level only.

    Fix: A good CFP covers legal entities, major currencies and intraday needs, with clear authority for transfers.

Worked examples

Example 1

A bank's early warning indicators show retail deposit outflows above their first threshold, but the survival horizon is still well above the minimum. Which action best fits a sound CFP? (A) Activate the full crisis plan and inform the public. (B) Escalate to treasury and ALCO for heightened monitoring and review of funding options. (C) Wait until the next quarterly board meeting. (D) Sell all liquid assets immediately.

Show the solution
  1. The stress level is low: first threshold breached, buffer still comfortable.
  2. Escalation should be proportionate and match the pre-set level.
  3. Option A over-reacts and could itself trigger a run.
  4. Option C is too slow and ignores the trigger.
  5. Option D destroys the buffer without need.
  6. Option B matches a low-level trigger: heightened monitoring and review by the treasury and ALCO.

Answer: B

Example 2

After a liquidity simulation, a bank finds that its team could not pledge collateral to the central bank within the required time. What is the most appropriate response under good CFP governance?

Show the solution
  1. The test revealed an operational gap, which is exactly what testing is for.
  2. Document the finding and assign an owner and a deadline.
  3. Fix the process, for example by pre-positioning collateral, updating legal documents and training staff.
  4. Update the CFP, report results to senior management and the board, and retest the fixed step.
  5. Do not wait for a real crisis, and do not simply note the result without action.

Answer: Record the gap, assign an owner, fix the collateral process, update the CFP, report to management and the board, and retest.

Exam tips

  • Match the response to the severity. Proportionate and pre-planned beats dramatic.
  • Board approves and oversees; management and the CMT execute. This distinction appears often.
  • For communication questions, pick early, consistent and honest, especially with regulators.
  • For testing questions, look for realistic scenarios, gap tracking and plan updates after the test.
  • Watch for options that rely on one person, ad hoc decisions or undocumented steps. They are usually wrong.

Practice questions from Contingency Funding Planning

Governance, Roles and Crisis Management Procedures: frequently asked questions

Who is responsible for the contingency funding plan?

The board approves the plan and oversees it. Senior management owns it and is accountable for its implementation. Treasury or ALM usually maintains it, while risk and internal audit provide independent challenge.

What does the crisis management team do?

It takes charge once escalation triggers are met. It monitors liquidity, decides which funding actions to use, coordinates communication and keeps a decision log. Members have defined roles and deputies.

How often should a CFP be tested and updated?

Review it at least annually and also after material changes in the business, the market or after a real stress event. Testing should be regular and realistic, with findings tracked and fixed.

Why should regulators be informed early?

Supervisors expect timely, candid information and may be able to help, for example through central bank facilities. Late or inconsistent disclosure can damage trust and worsen the situation.