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

A bank tracks both internal and external early warning indicators. Which of the following is best classified as an EXTERNAL (market-based) indicator?

A widening of the bank's CDS spread relative to peers is an external market-based indicator because it reflects how investors perceive the bank's credit risk. Deposit concentration, asset encumbrance, and cumulative funding gaps are internal measures calculated from the bank's own balance sheet and funding data.

  1. AWidening of the bank's own five-year CDS spread relative to peersCorrect
  2. BRising concentration of deposits among its ten largest depositors
  3. CIncrease in the share of assets that are encumbered
  4. DGrowing cumulative funding gap in the 30-day bucket

Explanation

The bank's CDS spread versus peers reflects market perception of its credit quality and is observed from outside the bank. The other three are internal balance sheet or funding profile measures drawn from the bank's own data.

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