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

Which of the following is an inherent limitation of relying on EWIs for liquidity risk management?

A key limitation is that indicators calibrated to past episodes may miss new kinds of stress, and some only move once stress has already started. They are therefore best used alongside stress testing and contingency funding plans, with judgement, not as a stand-alone guarantee of advance warning.

  1. AIndicators calibrated on past episodes may not capture the form or speed of a new type of stress, and several may move only once stress is already under wayCorrect
  2. BEWIs cannot be combined with stress testing or contingency funding plans
  3. CEWIs can only be applied to retail deposits
  4. DEWIs always produce a trigger at least a year before any stress event

Explanation

Because stress episodes differ and some indicators are coincident rather than leading, historical calibration can miss new patterns. EWIs are routinely integrated with stress testing and CFPs, apply to many funding sources, and offer no guaranteed lead time.

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