Skip to content

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

A bank's CFP shows that its EWIs all breached thresholds only after a rating downgrade, by which time wholesale funding had already become unavailable. What is the most appropriate remedial action?

The bank should add leading indicators, such as relative funding cost, concentration shifts and market-implied signals, and calibrate thresholds so management has time to act. The existing indicators were lagging, so removing them, relying on agencies or reporting them more often would not provide earlier warning.

  1. ARemove the thresholds that were breached late, since they provided no value
  2. BAdd leading indicators such as rising funding costs relative to peers, concentration changes and CDS and equity price signals, and calibrate thresholds to give lead time to execute actionsCorrect
  3. CRely on the rating agencies to give earlier warning of downgrades
  4. DIncrease reporting frequency of the existing lagging indicators only

Explanation

The issue is that indicators were lagging. Adding forward-looking indicators and calibrating thresholds to allow time to act addresses it. Increasing frequency of lagging indicators still yields late signals, and rating agencies are themselves lagging.

Did you get it right without looking?

One question tells you little. A timed set on Contingency Funding Planning shows your real accuracy, how long you take and where you lose marks.

Practise Contingency Funding PlanningFree diagnostic mock

More Contingency Funding Planning questions