FRM Part II · FRM Exam Part II · Early Warning Indicators
A bank's treasury team monitors a set of metrics intended to signal a possible deterioration in its liquidity position before a stress event fully develops, so that the contingency funding plan can be activated early. Which description best characterizes these metrics?
Early warning indicators are forward-looking signals of emerging liquidity or funding vulnerability. They are meant to alert management before a stress event fully develops, allowing the contingency funding plan to be activated early, unlike lagging measures that only confirm a shortfall after it has happened.
- AEarly warning indicators, which are forward-looking signals of emerging vulnerabilityCorrect
- BLagging indicators, which confirm a liquidity shortfall after it has occurred
- CRegulatory ratios, which are only reported quarterly to supervisors
- DCapital buffers, which absorb losses once a liquidity event begins
Explanation
Early warning indicators are designed to detect emerging vulnerabilities in liquidity or funding before a crisis crystallizes, and they link to contingency funding plan triggers. Lagging indicators confirm events after the fact, which defeats the purpose of early action.
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