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

A bank's board receives a monthly EWI report in which all indicators are green, yet the head of treasury notes that most indicators are calculated with month-end data and the bank's funding stress in a past episode developed within three days. Which limitation of the monitoring framework is most clearly illustrated?

The limitation is monitoring frequency that is too low. Month-end data and monthly reporting cannot detect liquidity stress that develops within days, so all-green reports can be misleading. Fast-moving risks need daily or intraday indicators, with higher frequency when warning signals appear.

  1. AExcessive reliance on external indicators
  2. BMonitoring frequency that is too low to detect fast-moving liquidity stressCorrect
  3. COver-sensitivity of thresholds causing false positives
  4. DLack of a liquidity buffer

Explanation

Month-end data and monthly reporting cannot capture stress that develops within days. Frequency should be increased, with daily indicators for fast-moving risks, and escalated when stress signals appear. The scenario gives no information on external indicators, false positives or the buffer.

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