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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A bank's treasurer is reviewing the bank's contingency funding plan (CFP). Which feature would a supervisor most expect a credible CFP to contain?

A credible contingency funding plan sets out stress scenarios, early warning indicators and escalation triggers, plus a prioritized set of actions with clear ownership. A base-case forecast or sole reliance on central bank support does not address stressed conditions.

  1. AStress scenarios with early warning indicators, defined escalation triggers, and a prioritized list of actions with assigned responsibilitiesCorrect
  2. BA single forecast of funding needs under normal market conditions, updated annually
  3. CA commitment to rely on central bank facilities as the primary source of funding in all scenarios
  4. DA list of the bank's most profitable business lines with targets for growth in stressed periods

Explanation

A credible CFP is built on stress scenarios, early warning indicators that trigger escalation, and clear action plans with named owners. A normal-conditions forecast is not a contingency plan. Relying on the central bank as the primary source is not considered prudent, because access is not guaranteed and carries stigma.

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