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

A bank's CFP uses early warning indicators with a two-tier escalation: amber triggers heightened monitoring by the Asset-Liability Committee (ALCO), and red triggers convening of the crisis management team. In a quarter, the bank's wholesale funding spreads widen sharply, and the treasurer privately judges it a temporary blip and does not escalate even though the red threshold was breached. What is the most significant governance weakness this illustrates?

The key weakness is that escalation rested on the treasurer's discretion instead of being automatic and independently monitored. When a predefined red trigger is breached, the crisis management team should be convened regardless of personal judgment, preventing bias and delay in responding to funding stress.

  1. AThe thresholds were set too conservatively
  2. BEscalation depends on individual discretion rather than being automatic and independently monitoredCorrect
  3. CEarly warning indicators should not be used with tiered triggers
  4. DThe ALCO should have replaced the crisis management team

Explanation

A breach of a predefined red trigger should force escalation regardless of personal judgment; discretion lets bias delay action. Independent monitoring, such as by risk, and mandatory reporting remedy this. Tiered triggers are accepted practice, and conservative thresholds are not the problem since the breach was real.

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