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

A treasurer wants indicators that capture the bank's funding profile rather than asset quality or market perception. Which set of indicators best fits this goal?

Rising short-term wholesale funding, shortening average deposit tenor and growing reliance on a few counterparties best describe funding-profile indicators, since they show how fragile and concentrated the funding base is. The other sets track earnings, asset quality, market perception or trading risk.

  1. ANet interest margin, nonperforming loan ratio, and return on equity
  2. BNegative equity analyst revisions, falling share price, and rating outlook change
  3. CRising share of short-term wholesale funding, declining average deposit tenor, and increasing reliance on a few counterpartiesCorrect
  4. DIncrease in trading VaR, higher counterparty exposure, and larger derivatives notional

Explanation

Funding-profile EWIs cover the funding mix, maturity and concentration, which the short-term wholesale share, shorter tenors and counterparty reliance reflect. Option A is earnings and asset quality, B is market perception, and D is market and counterparty risk measures.

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