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

A liquidity risk manager at a mid-sized bank classifies candidate indicators as internal (bank-specific) or external (market-wide). Which of the following is the best example of an external early warning indicator?

A sustained rise in interbank funding spreads together with a sharp fall in a sector-wide bank equity index is an external indicator, because it reflects market-wide conditions. Depositor concentration, asset encumbrance and the bank's own spread widening are bank-specific internal indicators.

  1. AWidening of the bank's own wholesale funding spreads relative to peers
  2. BIncreasing concentration of deposits among the ten largest depositors
  3. CA sustained rise in interbank funding spreads and a sharp fall in a broad bank equity index across the sectorCorrect
  4. DGrowing share of the bank's assets that are encumbered

Explanation

External indicators reflect market-wide conditions such as interbank spreads and sector equity prices. The other options are bank-specific: its own spreads, depositor concentration and asset encumbrance are internal measures of the bank's own position.

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