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FRM Part II · FRM Exam Part II · Liquidity Risk

A bank's contingency funding plan is being reviewed. Which feature is most consistent with sound practice for managing a funding liquidity crisis?

A sound plan defines early-warning triggers, escalation procedures and clear responsibilities, and lists diversified contingent funding sources. This allows action before a crisis deepens, unlike waiting for a downgrade, depending on one facility, or ignoring stressed market conditions.

  1. ARelying on a single central bank facility as the only source of emergency funding
  2. BDefining early-warning triggers, escalation procedures and clear roles, with a diversified list of contingent funding sourcesCorrect
  3. CActivating the plan only after the bank's credit rating is downgraded
  4. DExcluding stressed market conditions from the plan to keep it simple

Explanation

Effective contingency funding plans specify early indicators, decision-making authority and escalation, and a range of contingent sources that are tested. Waiting for a downgrade is too late, and single-source reliance or ignoring stress defeats the purpose.

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