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

A bank's treasury team monitors a dashboard of liquidity metrics. Which of the following is best classified as an internal (bank-specific) early warning indicator of liquidity stress?

A widening of the bank's own wholesale funding spreads relative to peers is an internal, bank-specific early warning indicator. It signals that counterparties are pricing in the bank's own deterioration, whereas equity indices, sovereign downgrades and policy rates are external, market-wide or macroeconomic signals.

  1. AA sudden widening of the bank's own wholesale funding spreads relative to peersCorrect
  2. BA fall in the national equity market index
  3. CA downgrade of the sovereign rating of a neighbouring country
  4. DA rise in the policy interest rate by the central bank

Explanation

Bank-specific indicators reflect the institution's own condition and market perception, such as its funding spreads versus peers, deposit outflows or rising reliance on short-term funding. The other options describe market-wide or macro developments, which are external indicators.

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