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

A bank uses a three-level traffic-light system for the ratio of insured retail deposits to total funding. Green is above 40%, amber is 35% to 40%, and red is below 35%. Over four weeks the ratio is 41%, 39%, 37%, 36%. The contingency funding plan states that red triggers activation of the crisis team. Which assessment is most appropriate?

The ratio is in amber at 36% and trending down, so it should be escalated and monitored more closely, since the red level of 35% is likely to be reached soon. The crisis team is not yet triggered, and moving the threshold would undermine the early warning purpose.

  1. ANo action is needed because the ratio has not breached the red threshold
  2. BThe crisis team should be activated since the ratio has been falling for three weeks
  3. CThe ratio is in amber with a persistent downward trend of about 1 to 2 points per week, so escalation and closer monitoring are warranted, and red is likely within about a weekCorrect
  4. DThe threshold should be lowered to 30% so the ratio returns to green

Explanation

At 36% the ratio is amber, not red, so crisis team activation is not yet triggered. But the decline (41 to 39 to 37 to 36) shows momentum, and at roughly 1 point or more per week red at 35% is close. Escalation and heightened monitoring are appropriate; lowering the threshold defeats the purpose of the EWI.

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