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

A bank's treasury team notices that its liquidity early warning indicators have been green for three years, and senior management proposes removing several indicators to reduce reporting burden. Which response is most consistent with sound governance of early warning indicators (EWIs)?

The bank should keep the indicators and review their relevance, thresholds and calibration regularly, including against stress and business changes. Silence in calm periods does not prove an indicator lacks predictive value, so removing indicators for not triggering weakens the early warning framework.

  1. ARemove any indicator that has not triggered during the period, since it has shown no predictive value
  2. BKeep the indicators but review their relevance, thresholds and calibration periodically, including against stress events and changes in the business modelCorrect
  3. CReplace all indicators with a single composite score to simplify escalation
  4. DDelegate indicator selection entirely to the business lines that generate the exposures

Explanation

Sound governance requires periodic review of EWI relevance and calibration against changes in business, markets and past stress. A lack of triggers in benign times does not show an indicator is useless, so removal on that basis is wrong. Independent oversight, not delegation to the business lines, should own selection.

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