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FRM Part II · FRM Exam Part II · Liquidity Risk

During a contingency funding plan (CFP) review, the board notes that early warning indicators have breached their thresholds, but no escalation occurred because the CFP does not state who decides to activate it. Which CFP deficiency is most directly illustrated?

The deficiency is weak governance: the plan lacks defined roles, escalation triggers and decision authority. Indicators breached thresholds, yet nobody was empowered to activate the CFP, so a sound CFP must assign responsibility for activation and communication.

  1. AAbsence of clear governance, with defined roles, escalation triggers and decision authorityCorrect
  2. BInsufficient diversification of the asset portfolio
  3. COverreliance on secured funding in the base case
  4. DFailure to run reverse stress tests on capital

Explanation

A CFP needs defined triggers linked to early warning indicators, a crisis team, and clear authority for activation and escalation. Here the indicators worked but no one was responsible for acting. The other options concern different issues that do not explain the failure to escalate.

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