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

A bank sets a two-tier EWI for its 30-day net cash outflow ratio: amber at 80% of the internal limit and red at 95%. The limit is a maximum net outflow of USD 500 million. Current projected 30-day net outflow is USD 465 million. What is the correct status and next step?

The status is amber. The amber trigger is 80% of USD 500 million, or USD 400 million, and the red trigger is USD 475 million. Projected outflow of USD 465 million lies between them, so management should escalate and monitor more closely without yet invoking the full contingency plan.

  1. AAmber; escalate and increase monitoring frequency, since 465 is above 400 but below 475Correct
  2. BGreen; no action is needed since the limit has not been breached
  3. CRed; invoke the full contingency funding plan since 465 exceeds 400
  4. DRed; the limit is breached because 465 exceeds 95% of 475

Explanation

Amber threshold = 0.80 x 500 = 400; red = 0.95 x 500 = 475. Outflow of 465 lies between 400 and 475, so it is amber. Waiting until the hard limit is breached defeats the early warning purpose, and it has not reached red.

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