Skip to content

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

A bank sets a three-tier traffic-light scheme for its ratio of wholesale funding maturing within 30 days to total funding: green below 18%, amber 18% to under 25%, red at 25% or above. Last month the ratio was 17%, and it is now 21%. What is the most appropriate response under a well-designed trigger framework?

The ratio has moved from green into amber, so it should be escalated to ALCO with closer monitoring and readiness to act if red is reached. Ignoring it wastes the early warning, full contingency activation is premature, and moving the threshold to avoid a breach undermines the framework.

  1. ATake no action because the ratio remains below the red threshold
  2. BEscalate the amber breach to the ALCO for review and increased monitoring, prepared to activate contingency actions if it reaches redCorrect
  3. CImmediately activate the full contingency funding plan as if the red threshold were breached
  4. DRaise the amber threshold so that the current reading returns to green

Explanation

Amber is designed to prompt escalation and heightened monitoring before a hard trigger is hit. Waiting for red wastes the early-warning benefit, while full CFP activation is a red-level response. Adjusting thresholds to avoid a breach undermines the framework's integrity.

Did you get it right without looking?

One question tells you little. A timed set on Early Warning Indicators shows your real accuracy, how long you take and where you lose marks.

Practise Early Warning IndicatorsFree diagnostic mock

More Early Warning Indicators questions