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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 another bank as a contingent funding source. Which concern is most important when assessing the reliability of this source in an idiosyncratic stress?

The key concern is whether the line has material adverse change or rating-trigger clauses allowing the lender to withdraw during the bank's own stress. A source that disappears when needed provides no real contingent funding, while pricing, currency and arrangement timing are secondary considerations.

  1. AWhether the line contains material adverse change or rating-trigger clauses that let the lender withdraw when the bank is stressedCorrect
  2. BWhether the line is denominated in the bank's home currency
  3. CWhether the interest rate on the line is below the bank's deposit rate
  4. DWhether the line was arranged before the bank's last audit

Explanation

Committed lines are only reliable if they cannot be cancelled in the scenario they are meant to cover. Material adverse change or rating triggers can allow withdrawal exactly when the bank is stressed. Currency, pricing and timing of arrangement are secondary matters.

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