Skip to content

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

A bank's treasury team tracks a set of metrics to detect emerging liquidity stress before it hits the balance sheet. Which description best characterizes an early warning indicator (EWI) in this context?

An early warning indicator is a forward-looking signal, drawn from internal or external information, that flags potential liquidity vulnerability so management can escalate and act before stress fully develops, rather than measuring outflows already realized.

  1. AA backward-looking measure of realized funding outflows over the previous quarter
  2. BA forward-looking signal, internal or external, that flags potential vulnerability and triggers escalation before a liquidity stress fully developsCorrect
  3. CA regulatory minimum that, once breached, automatically places the bank into resolution
  4. DA measure of the bank's total stock of high-quality liquid assets at period end

Explanation

EWIs are designed to be forward-looking and to prompt review or escalation of contingency planning before stress crystallizes. Backward-looking realized outflows describe losses already incurred, and regulatory minimums or HQLA stocks are not signals of emerging stress.

Did you get it right without looking?

One question tells you little. A timed set on Early Warning Indicators shows your real accuracy, how long you take and where you lose marks.

Practise Early Warning IndicatorsFree diagnostic mock

More Early Warning Indicators questions