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FRM Part II · FRM Exam Part II · Liquidity Risk

A contingency funding plan (CFP) is being reviewed by the risk committee. Which element is most important for the CFP to be operational during an actual liquidity crisis?

The CFP must tie early warning indicators to escalation triggers and specify who decides, who acts and how stakeholders are informed at each stage. Without clear roles and triggers the plan cannot be executed quickly, whatever the funding options listed.

  1. AEarly warning indicators linked to escalation triggers, with defined roles, decision authority and communication lines for each stress stageCorrect
  2. BA long narrative of the bank's historical funding successes
  3. CA single funding source assumed to be available under all conditions
  4. DA list of assets with book values, without considering time needed to monetise them

Explanation

An effective CFP links monitoring indicators to escalation triggers and assigns clear responsibilities and communication protocols. Historical narratives, reliance on a single source, or ignoring monetisation time do not help in executing actions under stress.

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