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

During a market-wide stress event, a bank's treasurer observes that interbank counterparties are shortening tenors offered to the bank, while the bank's repo haircuts on its non-government collateral are rising. Which interpretation and response best align with CFP principles?

The signals show funding access is tightening, so the bank should escalate under its CFP, review unencumbered collateral availability, and consider lengthening funding tenors. Waiting for a downgrade is too late, and dumping all HQLA would waste the buffer needed for the stress period.

  1. AThese are idiosyncratic signals only; no action is needed unless the bank's own rating is downgraded
  2. BThe signals indicate tightening funding access; the bank should escalate under the CFP, reassess the encumbrance and available unencumbered collateral, and consider extending funding tenorsCorrect
  3. CThe signals imply the bank should immediately sell all HQLA to raise cash before prices fall
  4. DThe signals should be ignored because haircut changes affect only the asset side of the balance sheet

Explanation

Shortening tenors and higher haircuts are classic signs of deteriorating secured and unsecured funding access. The CFP should trigger escalation, review of collateral availability, and actions such as lengthening funding. Selling all HQLA would destroy the buffer, and waiting for a downgrade is too late.

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