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

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

A widening of the bank's own CDS spread relative to peers is an external, market-based indicator because it comes from market pricing of credit risk. Funding concentration, depositor concentration and intraday credit usage come from the bank's own records, so they are internal.

  1. AWidening of the bank's own credit default swap spread relative to peersCorrect
  2. BGrowing concentration of wholesale funding maturing within 30 days
  3. CRising proportion of deposit balances held by the ten largest depositors
  4. DIncreasing use of intraday credit lines by the payments desk

Explanation

The bank's CDS spread is observed in the market and reflects counterparties' perception of its creditworthiness, making it a market-based external signal. The other three are measured from the bank's own funding and payment data, so they are internal indicators.

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