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

A bank sets a green/amber/red framework for its EWIs. The wholesale funding rollover rate falls into amber. Which governance response is most consistent with sound practice?

The amber breach should be escalated under predefined procedures to the responsible committee, with the indicator owner analysing causes and recommending actions. Waiting for red defeats the early-warning purpose, while full contingency plan activation is premature and removing the indicator is unjustified.

  1. AWait until the indicator reaches red before informing senior management, to avoid unnecessary escalation
  2. BEscalate to the designated committee per predefined procedures, with the owner assessing causes and proposing actionsCorrect
  3. CImmediately activate the full contingency funding plan including asset sales
  4. DRemove the indicator from the dashboard because it has become unreliable

Explanation

Early warning frameworks work only if breaches trigger predefined escalation and analysis. Amber is a prompt for review and possible preparatory action, not necessarily full CFP activation. Waiting for red defeats the 'early' purpose, and removing the indicator is unjustified.

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