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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's treasurer is designing the scenarios for its contingency funding plan (CFP). Which design choice best reflects sound practice for liquidity stress scenarios used to trigger and calibrate the CFP?

The best practice is to use idiosyncratic, market-wide and combined scenarios with varying severity and duration. This exposes different funding vulnerabilities and tests whether the contingency funding plan works under diverse conditions, rather than relying on one scenario or only on events that previously occurred.

  1. AUse only a single idiosyncratic scenario, since market-wide stress is outside the bank's control
  2. BInclude idiosyncratic, market-wide and combined scenarios, with differing severity and durationCorrect
  3. CUse only historical scenarios that have already occurred at the bank
  4. DSet scenarios so that the bank always passes with no use of contingent funding sources

Explanation

Sound practice calls for several scenario types (bank-specific, market-wide, and combined) at varying severities and time horizons, so the CFP is tested against different stress dynamics. A single scenario or only past events leaves blind spots, and calibrating to always pass defeats the purpose of stress testing.

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