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FRM Part II · FRM Exam Part II · Monitoring Liquidity

A bank's monitoring dashboard shows a stable LCR above 130%, but over two weeks the bank's average unsecured term funding spread widens by 40 bp, the share of funding from a single wholesale counterparty rises from 12% to 22%, and intraday peak usage grows 30%. What is the most appropriate interpretation?

Escalation is warranted. Widening funding spreads, rising counterparty concentration and higher intraday usage are early warning indicators of growing funding fragility that a healthy LCR does not capture, so management should review triggers and contingency measures rather than rely on regulatory ratio compliance.

  1. ANo action is needed because the LCR remains well above the minimum
  2. BThe LCR should be recalculated using only retail deposits
  3. COnly the intraday increase matters, as the other metrics are market-driven
  4. DEarly warning indicators suggest rising funding fragility and concentration that the LCR does not capture, so escalation and review of triggers is warrantedCorrect

Explanation

The LCR is a point-in-time regulatory metric. Widening spreads, concentration and rising intraday use are early warning indicators of deterioration, so management should escalate and review contingency triggers rather than rely on compliance with the ratio.

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