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

A bank sets an EWI threshold for the 3-month cost of unsecured wholesale funding relative to a peer benchmark. After a quiet year the committee proposes loosening the threshold substantially so that it triggers less often. Which governance concern is most relevant?

Loosening a threshold simply to cut triggers risks making the indicator too insensitive and delaying escalation. Any recalibration should be supported by analysis, documented, independently challenged and approved by the proper governance body, rather than driven by the business line or by a quiet period.

  1. ALoosening thresholds only to reduce the number of triggers can make the indicator insensitive and delay escalation, so changes should be justified, documented and approved by the appropriate governance bodyCorrect
  2. BThresholds should never be reviewed once approved because changes undermine comparability
  3. CThresholds should be set by the business line that manages funding to ensure they are practical
  4. DFewer triggers always indicate the framework is working better, so the change is appropriate

Explanation

Calibration should rest on analysis of sensitivity and false signals, with independent challenge and formal approval. Relaxing merely to avoid triggers risks missing real stress. Never reviewing is also poor practice, and letting the managed business set thresholds creates a conflict of interest.

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