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

A bank's liquidity risk team classifies its early warning indicators. Which of the following is best classified as an external (market-wide) indicator rather than an internal (bank-specific) indicator?

A sharp widening of interbank funding spreads across the whole banking sector is an external, market-wide indicator because it reflects conditions outside the bank's control. Depositor concentration, rising credit line usage and the bank's own spread versus peers are bank-specific signals.

  1. ARising concentration of funding from the ten largest depositors
  2. BWidening of the bank's own senior unsecured funding spreads relative to peers
  3. CA sharp widening of interbank funding spreads across the whole banking sectorCorrect
  4. DIncreasing use of the bank's committed credit lines by corporate clients

Explanation

Sector-wide interbank spread widening reflects market conditions beyond the bank's own actions, so it is external. Depositor concentration and credit line drawdowns are internal balance sheet or behavioural indicators. The bank's own spread relative to peers is a bank-specific signal, which makes it a distractor.

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