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

A bank's CFP lists early warning indicators (EWIs) and links them to stress levels. Which design feature makes the EWI framework most useful to the CFP?

EWIs are most useful when they are linked to predefined trigger levels that automatically prompt escalation and specific management actions. This connects monitoring to response, so the bank moves from normal operations to contingency mode early, before the stress becomes severe, using both internal and market-wide signals.

  1. AIndicators are reviewed only annually to keep thresholds stable
  2. BIndicators are tied to predefined trigger levels that prompt escalation and specific actionsCorrect
  3. CIndicators are limited to the bank's own metrics, excluding market-wide signals
  4. DIndicators are used solely for regulatory reporting

Explanation

EWIs matter in a CFP when breaching thresholds activates escalation and predefined responses. Restricting them to internal data ignores market signals such as widening CDS spreads, and annual-only review makes them stale. Regulatory-only use does not drive action.

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