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FRM Part II · FRM Exam Part II · Early Warning Indicators

A bank's contingency funding plan links EWIs to escalation actions. Which structure best reflects sound practice for triggers?

Sound practice defines graduated thresholds in advance, each tied to a responsible owner and a specific escalation action, and reviews them periodically. Ad hoc triggers or all-or-nothing activation reduce the timeliness and proportionality of the response, and reviewing only after an event defeats the purpose.

  1. APredefined threshold levels, each linked to a named owner and a specified escalation action, with periodic recalibrationCorrect
  2. BA single trigger that automatically activates the full contingency funding plan whenever any indicator moves
  3. CTriggers set at management's discretion at the time of stress to preserve flexibility
  4. DTriggers reviewed only after a liquidity event has occurred

Explanation

Sound practice defines thresholds in advance, ties them to responsibilities and graduated actions, and recalibrates them regularly. Full automatic activation is blunt, while ad hoc or post-event setting removes the early-warning value.

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