FRM Part II · FRM Exam Part II · Monitoring Liquidity
A bank's CFP lists early warning indicators. Which indicator would most appropriately trigger escalation to the crisis management team for a possible idiosyncratic liquidity event?
The best trigger is a sustained widening of the bank's own CDS spread combined with shorter unsecured funding tenors and higher funding costs than peers. These bank-specific signals show eroding market confidence, whereas policy rate moves, seasonal deposits or asset growth are not idiosyncratic warnings.
- AA modest rise in the policy interest rate
- BA seasonal increase in retail deposits at year-end
- CA sustained widening of the bank's own CDS spread together with falling unsecured funding tenors and rising funding costs relative to peersCorrect
- DA slight increase in the bank's total assets
Explanation
Bank-specific market signals such as CDS widening, shortening wholesale tenors and higher relative funding costs indicate declining counterparty confidence, a classic idiosyncratic warning. Policy rate moves and seasonal deposit patterns are not bank-specific, and modest asset growth is not a stress signal.
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