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

A bank's CFP relies on a committed credit line from a correspondent bank as a contingent source. Which concern is most important when assessing whether to count this line toward stress liquidity?

The key concern is reliability under stress: the provider may face stress at the same time, and clauses such as material adverse change conditions may block drawdown. A line that cannot be counted on when needed should not be treated as a dependable contingent source.

  1. AWhether the line's interest rate is below the bank's average deposit cost
  2. BWhether the line's counterparty may be stressed at the same time and whether the line contains material adverse change clauses or conditions that restrict drawdownCorrect
  3. CWhether the line was originally arranged before the bank's last audit
  4. DWhether the line is denominated in the bank's reporting currency only

Explanation

A contingent line is valuable only if it is reliably available in stress. Wrong-way correlation with the provider and conditions allowing the lender to refuse or cancel funding undermine reliability. Pricing, audit timing and currency are secondary.

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