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

A bank sets an early warning trigger so that its contingency funding plan is escalated when the 30-day liquidity coverage measure falls to 115% against a regulatory minimum of 100%. Last month the measure was 125%, and it is now 112%. What is the appropriate interpretation?

The 112% reading is below the 115% internal trigger but above the 100% regulatory minimum, so the trigger is breached. Escalation under the contingency funding plan is warranted now, because early warning thresholds are set above hard limits to allow action before a regulatory breach.

  1. AThe trigger has been breached while the regulatory minimum is still met, so escalation is warranted before a regulatory breachCorrect
  2. BNo action is needed because the ratio remains above 100%
  3. CThe bank has breached the regulatory minimum and must stop all lending
  4. DThe trigger only matters if the ratio falls below 100%

Explanation

112% is below the 115% internal trigger but above the 100% minimum. Early warning triggers are set with a buffer above hard limits precisely so management can act before a regulatory breach. Option 2 ignores the trigger's purpose.

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