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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 is most consistent with sound practice?

The best design combines internal and external early warning indicators with graduated thresholds, each linked to specific escalation actions. This gives management time to act before a crisis deepens. Relying only on internal data, using a late single trigger, or reviewing only after events would undermine the CFP.

  1. AUse only internal indicators such as deposit outflows, because market indicators are too noisy to be reliable
  2. BCombine internal and external indicators, set graduated thresholds, and link each threshold to defined escalation actionsCorrect
  3. CSet a single trigger at the point where the bank has already exhausted its liquidity buffer
  4. DReview the indicators only after an actual stress event has occurred to calibrate them to that event

Explanation

Sound CFP practice uses both internal indicators (funding concentrations, deposit run-off, buffer usage) and external ones (CDS spreads, equity price, rating outlook). Graduated thresholds tied to escalation actions give management time to respond. A single trigger at buffer exhaustion is far too late, and internal-only indicators miss market-perceived deterioration.

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