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

A bank monitors internal and external EWIs. Which of the following is best classified as an external (market-based) liquidity early warning indicator?

A widening of the bank's own CDS spread relative to peers is an external, market-based indicator because it reflects how market participants perceive the bank's credit and funding risk. Wholesale maturity share, depositor concentration and intraday overdraft usage are measured from internal data.

  1. AA widening of the bank's own senior unsecured CDS spread relative to peersCorrect
  2. BA rising share of wholesale funding maturing within 30 days
  3. CAn increase in the concentration of deposits among the top 20 depositors
  4. DA growing intraday overdraft usage at the central bank

Explanation

CDS spreads and relative market pricing are observed in the market and reflect counterparties' perception of the bank. The other options are measured from the bank's own balance sheet, funding profile, or payment activity, so they are internal indicators.

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