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

A bank's treasurer is designing the scenarios used to size the liquidity needs in its contingency funding plan (CFP). Which design choice is most consistent with sound practice?

The best practice is to use a range of scenarios: idiosyncratic, market-wide and combined, at different severities and durations. A single scenario or purely historical outcomes ignore plausible unseen shocks, and assuming central bank support undermines the test of the bank's own resilience.

  1. AUse only a single idiosyncratic scenario, since market-wide events are too rare to model
  2. BCombine idiosyncratic, market-wide and combined scenarios of varying severity and durationCorrect
  3. CBase all scenarios on the worst outflow actually observed in the bank's own history
  4. DAssume that central bank facilities will fully cover any shortfall, so scenarios can be mild

Explanation

Sound CFP stress testing uses multiple scenario types (bank-specific, market-wide, and combined) with different severities and time horizons. Relying only on one scenario or on past experience leaves the bank exposed to events it has not yet seen, and assuming central bank support removes the purpose of the test.

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