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

A bank sets a two-level EWI framework: amber at 15% wholesale funding rollover shortfall and red at 30%. Last month the indicator hit 18% and the treasurer chose not to escalate because the contingency funding plan trigger is only at red. Which criticism is most valid from a governance perspective?

The valid criticism is that an amber breach should still trigger defined actions such as more frequent monitoring and notifying ALCO. Early warning indicators exist to prompt action before stress reaches the red level, so ignoring amber undermines governance, though full contingency plan activation at amber would be excessive.

  1. AThe bank should have no amber level, since only red breaches matter
  2. BAmber breaches should trigger defined monitoring and escalation actions, such as increased reporting frequency and notification of the ALCO, rather than being ignoredCorrect
  3. CThe treasurer should have activated the full contingency funding plan immediately
  4. DThe thresholds should be removed because they are subjective

Explanation

The purpose of early warning thresholds is to prompt action before a crisis. An amber breach should lead to enhanced monitoring and escalation to senior committees. Activating the full CFP at amber would be disproportionate, and removing thresholds would eliminate the discipline.

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