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FRM Part II · FRM Exam Part II · Liquidity Risk Management

A mid-sized bank's treasury team is drafting its contingency funding plan (CFP). Which of the following features is most consistent with sound practice for a CFP?

A sound contingency funding plan has triggers tied to early warning indicators, clear roles and responsibilities, and a range of actions scaled to the severity of stress. Relying on one action, assuming open markets, or lacking a central crisis team would leave the bank unprepared.

  1. AActivation triggers based on early warning indicators, with clearly assigned roles and a menu of actions sized to different stress severitiesCorrect
  2. BA single funding action, such as central bank borrowing, designed to cover every stress scenario
  3. CReliance on the assumption that wholesale markets will remain open throughout an idiosyncratic stress event
  4. DOwnership of the plan by the business lines that generate the funding needs, without a central crisis team

Explanation

A sound CFP links monitored early warning indicators to defined escalation triggers, assigns responsibilities, and lists actions scaled to stress severity. A single action ignores differing scenarios. Assuming markets stay open defeats the purpose of the plan, and decentralized ownership without a crisis team undermines coordinated execution.

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