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

A treasurer proposes counting an undrawn committed credit line from another bank as a core component of the contingent funding buffer. Which is the most significant concern a risk manager should raise?

The main concern is reliability: the provider may be unable or unwilling to fund in stress, covenants or material adverse change clauses may block drawing, and a draw can signal distress. Such lines should be heavily discounted rather than treated as a core buffer.

  1. ACommitted lines are always more expensive than central bank facilities
  2. BThe line may be unavailable or withdrawn in stress due to covenants, material adverse change clauses, or the provider's own liquidity pressure, and drawing it may signal distressCorrect
  3. CThe line cannot be used to meet intraday needs
  4. DUndrawn lines increase the bank's risk-weighted assets on the asset side

Explanation

Reliance on third-party lines creates wrong-way and availability risk: conditions precedent, provider stress, and signaling effects on drawdown. Cost and intraday points are secondary and not the key concern for buffer reliability.

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