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

A bank's liquidity EWI for retail deposit outflows has a red threshold at a 3% weekly decline. Over 52 weeks the indicator breached red 13 times, but a genuine liquidity event followed only 2 of those breaches, and the bank experienced 4 genuine events in the year in total. What is the best interpretation?

Precision is 2 of 13 breaches, about 15%, so most signals are false alarms. Only 2 of 4 genuine events were preceded by a breach, a 50% capture rate. The indicator is noisy and misses half the events, so thresholds or complementary indicators need review.

  1. AThe indicator has about 15% precision (2/13) and 50% hit rate (2/4), so it produces many false alarms and misses half of the eventsCorrect
  2. BThe indicator has 50% precision and 15% hit rate, so it is reliable
  3. CThe indicator is perfect because every event was preceded by a breach
  4. DThe indicator has 25% precision and 100% hit rate

Explanation

Of 13 breaches, 2 were followed by events: 2/13 ≈ 15% precision (so about 85% false alarms). Of 4 genuine events, 2 were signalled: 2/4 = 50% captured. Option B swaps the measures; C and D contradict the data.

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