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

A bank's CFP defines three stress stages tied to early warning indicators: Stage 1 (watch), Stage 2 (elevated) and Stage 3 (crisis). The indicators move to Stage 2 on a Friday. Which action is most consistent with sound crisis management procedures?

The bank should escalate to the crisis team under the plan's predefined triggers, raise monitoring frequency and prepare funding actions. Early warning stages exist so that response starts before a full crisis. Delaying notification or dumping assets indiscriminately defeats the plan's structured, proportionate approach.

  1. AWait until Stage 3 is reached before notifying senior management, to avoid unnecessary alarm
  2. BEscalate to the crisis team according to the plan's predefined triggers, increase monitoring frequency and prepare funding actionsCorrect
  3. CImmediately sell all liquid assets to build cash before the weekend
  4. DDelegate all response decisions to the front-office traders who understand market conditions

Explanation

Predefined triggers exist so that escalation and increased monitoring occur automatically as conditions deteriorate, and so preparatory actions can begin before a crisis. Waiting until Stage 3 undermines the early warning purpose, and a full fire sale is disproportionate and may signal distress. Front-office-only decisions weaken governance and independence.

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