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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's CFP assumes that its committed credit line from a correspondent bank will be fully available during a market-wide crisis. Which critique is most appropriate?

The assumption is weak because in a market-wide crisis the line provider may itself be stressed or constrained, and drawdown conditions may limit access. A sound CFP tests the reliability of contingent sources, diversifies providers, and applies conservative haircuts rather than assuming full availability.

  1. AThe assumption is reasonable because committed lines are legally binding in all circumstances
  2. BThe assumption ignores that counterparties may be stressed, face their own constraints, or that conditions may limit drawdown, so reliability should be tested and haircutCorrect
  3. CThe assumption is too conservative because lines usually increase in size during stress
  4. DThe assumption is irrelevant because contingent sources do not belong in a CFP

Explanation

Contingent sources can be unreliable in systemic stress: providers may be under strain, face concentration limits, or conditions may restrict draws. A sound CFP tests availability, diversifies providers and applies realistic assumptions. Lines do not typically grow in stress, and contingent sources are central to a CFP.

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