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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A contingency funding plan (CFP) for a bank is being redesigned. Which feature best reflects sound practice?

A sound contingency funding plan uses early warning indicators tied to defined escalation steps and clear responsibilities, covering multiple stress scenarios. Waiting for a regulatory breach or relying on the central bank first would act too late or treat a last resort as primary.

  1. ATriggers based on early warning indicators linked to pre-defined escalation actions and clear rolesCorrect
  2. BA single stress scenario based on the bank's worst historical outflow
  3. CReliance on central bank facilities as the first and primary source of liquidity
  4. DAction plans activated only after the regulatory liquidity ratio is breached

Explanation

A CFP should have early warning indicators that trigger escalation, with assigned responsibilities and actions. A single scenario is too narrow, central bank access is a last resort, and waiting for a ratio breach is too late.

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