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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A mid-sized bank's treasury team is designing the early warning indicator (EWI) framework that will feed its contingency funding plan (CFP). Which design feature best reflects sound practice?

The best design combines internal and external early warning indicators with thresholds linked to escalating contingency funding plan stages. This gives timely, broad signals of stress and clear actions, whereas internal-only, single-ratio or post-event approaches are too narrow or too late.

  1. AUsing only internal indicators, since market data are too noisy to be reliable
  2. BCombining internal indicators such as deposit outflows with external indicators such as widening CDS spreads, with thresholds that escalate to defined CFP stagesCorrect
  3. CSetting a single trigger based on the regulatory liquidity coverage ratio so the framework matches the reporting requirement
  4. DReviewing indicators only after a stress event so thresholds reflect actual experience

Explanation

Sound CFP practice uses a mix of internal and external EWIs, with thresholds tied to escalation stages and actions. Relying only on internal data misses market-wide signals, a single regulatory ratio is a lagging and narrow measure, and post-event review defeats the early warning purpose.

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