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

A liquidity risk manager is choosing between a leading and a lagging indicator for detecting funding stress. Which choice best illustrates a leading indicator?

A growing share of rate-sensitive, uninsured corporate deposits is a leading indicator because it reveals rising vulnerability before outflows happen. A lower LCR after outflows, a downgrade after losses, or an emergency facility drawdown all record stress that has already occurred, so they are lagging.

  1. AA steady rise in the share of deposits from rate-sensitive, uninsured corporate clients before any outflows occurCorrect
  2. BA reported decline in the liquidity coverage ratio after a large outflow has occurred
  3. CA rating downgrade following a quarter of losses
  4. DA realised drawdown of the central bank emergency facility

Explanation

Leading indicators signal vulnerability before stress materialises, such as growing concentration in flighty deposits. The other options are outcomes of stress that has already happened, so they are lagging or coincident measures.

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