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

A bank's CFP defines stages of stress severity, each tied to quantitative and qualitative early warning indicators and a specified set of escalating actions. What is the main benefit of linking indicators to stages in this way?

Tying early warning indicators to stress stages lets the bank detect worsening conditions early and activate predefined, escalating responses promptly and in a coordinated way. It does not replace stress testing or guarantee that central bank support will never be needed.

  1. AIt guarantees that the bank will never need central bank funding
  2. BIt eliminates the need to run liquidity stress tests
  3. CIt allows the bank to recognise deterioration early and trigger predefined responses in a timely, coordinated mannerCorrect
  4. DIt permits management to rely solely on lagging accounting measures

Explanation

Linking indicators to stages makes escalation systematic: when a trigger is breached, predefined actions and governance start without delay. It does not remove stress testing, guarantee avoidance of central bank support, or rely on lagging data; indicators are meant to be forward-looking.

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