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

A bank's liquidity risk team is choosing which internal indicator would give the earliest warning of a possible funding problem. Which of the following is most appropriate as an early warning indicator?

A rising share of short-maturity wholesale funding combined with widening spreads on the bank's own unsecured debt is the best early warning indicator. It signals growing rollover risk and deteriorating market confidence before outflows occur, whereas annual income, branch counts and goodwill are backward-looking or unrelated.

  1. ARising share of wholesale funding that matures within 30 days, with widening spreads on the bank's own unsecured issuanceCorrect
  2. BAnnual audited net income for the prior fiscal year
  3. CThe historical count of branches opened in the last five years
  4. DThe bank's reported goodwill balance at year-end

Explanation

Growing short-term wholesale reliance and widening own-funding spreads reflect increasing rollover risk and market perception, and are timely signals. The other options are backward-looking or unrelated to funding conditions.

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