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

When setting trigger thresholds for liquidity EWIs, which approach is most consistent with sound practice?

Thresholds should be calibrated to the bank's own risk appetite and experience, linked to predefined escalation actions, and reviewed regularly. Copying peers ignores business model differences, permanent thresholds become stale, and setting triggers only at asset-sale levels removes the early-warning value.

  1. ACalibrate thresholds to the bank's risk appetite and past experience, link each level to predefined escalation actions, and review them periodicallyCorrect
  2. BAdopt identical thresholds used by peer banks regardless of business model
  3. CFix thresholds permanently at inception to preserve comparability
  4. DSet triggers solely at levels that would require immediate asset sales

Explanation

Thresholds should reflect the institution's own risk appetite, funding profile and experience, tie to defined actions, and be reviewed as conditions change. Copying peers ignores differing business models, fixed thresholds become stale, and triggering only at asset-sale levels is too late to be early warning.

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