FRM Part II · FRM Exam Part II · Early Warning Indicators
A bank's treasury team reviews its early warning indicator (EWI) framework. Which description best captures the primary purpose of an EWI in liquidity risk management?
An early warning indicator is meant to flag emerging weaknesses in liquidity or funding access early enough for management to take action before stress fully develops. It complements stress tests and contingency funding plans rather than replacing them or reporting past losses.
- ATo signal emerging vulnerabilities in the bank's liquidity position or funding access early enough for management to act before a stress event fully developsCorrect
- BTo replace the liquidity stress testing programme with a single threshold-based measure
- CTo report realised liquidity losses to regulators after a crisis has ended
- DTo determine the bank's minimum regulatory capital requirement for liquidity risk
Explanation
EWIs are forward-looking signals intended to trigger escalation and possible contingency actions before stress crystallises. They complement, not replace, stress testing. They are not backward-looking loss reports nor a capital calculation.
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