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

A bank's EWI dashboard relies on a single indicator: the loan-to-deposit ratio. It stayed stable while the bank rapidly increased reliance on uninsured wholesale deposits that later ran off. Which limitation of EWIs does this best illustrate?

It illustrates reliance on too narrow a set of indicators. A single loan-to-deposit ratio missed the growing dependence on uninsured wholesale funding. Effective frameworks combine many internal and market-based indicators covering funding concentration, composition and other vulnerabilities.

  1. AExcessive false positives from overly tight thresholds
  2. BReliance on a narrow set of indicators that fails to capture a key vulnerability, lacking both internal and market-based coverageCorrect
  3. CLagging data caused by quarterly accounting reporting only
  4. DDouble counting of the same risk across multiple indicators

Explanation

The problem is insufficient breadth: a single balance-sheet ratio missed the funding concentration and deposit composition risk. A good framework combines internal and external/market indicators across several dimensions. The scenario does not describe false alarms or double counting.

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