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

A bank's treasury team monitors a set of metrics to detect emerging liquidity stress before it affects funding. Which of the following best describes an early warning indicator (EWI) in this context?

An early warning indicator is a forward-looking internal or external signal showing growing vulnerability to liquidity stress, allowing management to act before the problem materializes. It is not a historical loss measure or a trigger that applies only after the contingency plan has already been invoked.

  1. AA measure of past realized losses used to calibrate capital buffers
  2. BA forward-looking signal, internal or external, that flags rising vulnerability to a liquidity stress event so management can act earlyCorrect
  3. CA regulatory ratio that is computed only at quarter-end and reported to the supervisor
  4. DA trigger that is activated only after the contingency funding plan has been invoked

Explanation

EWIs are designed to signal the potential for liquidity problems before they crystallize, giving time to prepare or activate contingency measures. Backward-looking loss measures and post-activation triggers do not serve that purpose, and EWIs are monitored continuously rather than only at quarter-end.

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