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

A bank's treasury team is designing its liquidity early warning indicator (EWI) framework. Which description best reflects the primary purpose of an EWI?

An early warning indicator is meant to flag emerging weaknesses in a bank's liquidity or funding before a stress event fully develops, giving management time to escalate and act. It is forward-looking and complements stress testing, rather than measuring past losses or setting regulatory minimums.

  1. ATo signal emerging vulnerabilities in liquidity position or funding so management can act before a stress event fully developsCorrect
  2. BTo replace the liquidity stress testing program with a single quantitative measure
  3. CTo measure realized liquidity losses after a funding crisis has occurred
  4. DTo set the regulatory minimum liquidity coverage requirement for the bank

Explanation

EWIs are forward-looking signals of potential liquidity stress, intended to trigger escalation and the contingency funding plan early. They complement rather than replace stress testing, are not backward-looking loss measures, and do not set regulatory minimums.

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