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

A treasury risk manager sets a three-level traffic-light framework for the EWI 'share of wholesale funding maturing within 30 days'. Green is below 20%, amber is 20% to 30%, and red is above 30%. The indicator reads 27%, up from 18% a month earlier. Which action is most consistent with a well-designed trigger framework?

The bank should escalate to the ALCO under the amber protocol and investigate why the indicator rose so quickly. The reading is in the amber band, so action is already required. Waiting for red loses the early-warning benefit, while moving thresholds or fully activating the contingency plan would be inappropriate.

  1. ATake no action because the indicator has not breached the red threshold
  2. BReset the amber threshold to 35% so the indicator returns to green
  3. CEscalate to the ALCO under the amber protocol and examine the cause of the rapid increaseCorrect
  4. DImmediately activate the full contingency funding plan as for a red breach

Explanation

At 27% the indicator is in amber, which should trigger the defined escalation and analysis, and the 9-point monthly rise adds concern about trend. Waiting for red defeats the early-warning purpose, and moving thresholds to avoid a signal undermines integrity. Full CFP activation is reserved for the red level.

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