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

A bank sets a two-tier threshold for its 30-day net outflow indicator: amber at 60% of the internal limit and red at 80%. The limit is USD 500 million. Current projected 30-day net outflow is USD 420 million. What is the status and the appropriate action?

The status is red. The red trigger is 80% of USD 500 million, or USD 400 million, and the projected outflow of USD 420 million exceeds it while remaining below the limit. Escalation under the protocol is required before an actual limit breach occurs.

  1. AGreen; no action is required because the limit has not been breached
  2. BAmber; monitor more frequently only, since red has not been reached
  3. CRed; escalate to the appropriate committee/senior management per the escalation protocol even though the limit is not breachedCorrect
  4. DLimit breached; invoke the contingency funding plan's most severe stage immediately

Explanation

Red threshold = 0.8 x 500 = USD 400 million; amber = USD 300 million. Outflow of 420 exceeds 400 but is below the 500 limit (84% of limit). So the status is red, triggering escalation, while the limit itself is not breached. Treating it as amber understates the signal.

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