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

During a liquidity stress, a bank's early warning indicators breach their escalation thresholds. According to good CFP crisis management practice, what should happen first?

Breaching escalation thresholds should activate the pre-defined escalation process, bringing in the crisis management team to assess severity and decide whether to invoke the CFP. Hasty asset sales or delayed board notification would weaken control and could worsen the stress.

  1. AThe treasurer should sell the least liquid assets to demonstrate to the market that the bank has ample liquidity
  2. BThe pre-defined escalation process should activate the crisis management team, which assesses severity and decides whether to invoke the CFPCorrect
  3. CThe board should be informed only after the contingency funding sources have been fully drawn
  4. DPublic disclosure of the breach should be made before internal assessment to preserve credibility

Explanation

Thresholds link monitoring to action: a breach triggers escalation to the crisis team, which evaluates the situation and decides on activation. Selling illiquid assets first would likely crystallise losses, and delaying board notification undermines oversight.

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