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

A bank sets an amber trigger for its wholesale funding EWI at a 20% rollover shortfall and a red trigger at 35%. Last month the indicator read 18%, and this month it reads 27%, with no breach of any hard limit. What is the most appropriate response under a sound EWI framework?

The bank should escalate the amber breach to the ALCO, investigate why rollover is deteriorating, and consider early mitigation such as extending funding tenor or building buffers. Waiting for a red trigger wastes the warning, full contingency activation is premature, and loosening thresholds to restore green undermines the framework.

  1. AIgnore it, since no red trigger or hard limit has been breached
  2. BEscalate to the ALCO per the amber protocol, investigate the cause, and consider pre-emptive actions such as lengthening funding or building liquid buffersCorrect
  3. CImmediately activate the full contingency funding plan as if a red trigger were hit
  4. DRaise the amber threshold to 30% so the indicator returns to green

Explanation

Crossing amber requires escalation and analysis, with possible early mitigation, since the purpose is to act before limits are hit. Ignoring it defeats the framework, full CFP activation is reserved for red or crisis conditions, and recalibrating thresholds to avoid signals undermines governance.

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