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

A bank's treasurer reviews which indicators best capture funding-structure vulnerability that builds slowly. Which indicator is most appropriate as a structural, slow-moving EWI of rising liquidity risk?

A rising loan-to-deposit ratio driven by loan growth funded with short-term wholesale borrowing is the structural, slow-moving indicator, since it shows increasing reliance on less stable funding. Intraday CDS moves, daily share price changes and press mentions are fast-moving market or sentiment signals.

  1. AIntraday change in the bank's credit default swap spread
  2. BA rising loan-to-deposit ratio driven by growth in loans funded by short-term wholesale borrowingCorrect
  3. CDaily fluctuation in the bank's share price
  4. DThe number of press articles mentioning the bank in the last hour

Explanation

A rising loan-to-deposit ratio funded by short-term wholesale money indicates growing reliance on less stable funding, a gradual structural vulnerability. The other choices are high-frequency market signals that are noisy and reflect sentiment rather than slowly accumulating structure.

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