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FRM Part II · FRM Exam Part II · Early Warning Indicators

A bank finds that its EWIs are frequently breached during normal seasonal funding patterns, leading business lines to ignore the alerts. What is the most appropriate design response?

The bank should recalibrate thresholds for seasonality and review each indicator's false-positive rate. This reduces alert fatigue while keeping the indicators sensitive to real deterioration. Removing thresholds, widening them until no breach occurs, or abandoning quantitative measures would undermine the objectivity and usefulness of the early warning framework.

  1. ARemove all thresholds and rely on management judgment alone
  2. BWiden every threshold permanently until no breaches occur
  3. CReplace all quantitative indicators with qualitative commentary
  4. DRecalibrate thresholds to account for seasonality and review indicators for false-positive ratesCorrect

Explanation

Frequent false alarms cause alert fatigue and weaken the framework. Adjusting for seasonal patterns and testing false-positive rates keeps sensitivity while improving relevance. Removing thresholds or widening them until nothing triggers destroys the early-warning function, and dropping quantitative indicators removes objectivity.

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