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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank's contingency funding plan defines three stress stages: Stage 1 (heightened monitoring), Stage 2 (moderate stress), and Stage 3 (severe stress). Wholesale funding rollover rates fall sharply and the bank loses access to unsecured markets for tenors beyond one week, though retail deposits remain stable. Which action is most consistent with good CFP design at this point?

The bank should escalate to the pre-defined stress stage, convene the liquidity crisis team, and start activating contingent funding sources such as repo of unencumbered securities. A CFP links indicators to escalation and actions; waiting, liquidating the entire buffer, or halting reporting would worsen the position.

  1. AWait for a rating downgrade before convening the crisis management team
  2. BEscalate to the pre-defined stage, convene the liquidity crisis team, and begin activating identified contingent sources such as repo of unencumbered securities and central bank facilities testingCorrect
  3. CImmediately sell all of the high-quality liquid asset buffer to reduce balance sheet size
  4. DSuspend all internal reporting to avoid signalling weakness to the market

Explanation

A CFP should link indicators to defined stages with clear governance and actions. Loss of term unsecured access is a trigger for escalation and use of contingent sources. Waiting for a downgrade is reactive, selling the whole buffer destroys the protection, and suspending reporting undermines decision making.

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