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

Which practice best improves the effectiveness of a bank's liquidity EWI framework?

Calibrating thresholds to the bank's own business model and funding profile, and tying each trigger to defined escalation steps in the contingency funding plan, makes EWIs effective. Generic thresholds, lagging data or very wide triggers would delay or weaken the warning signal.

  1. ACalibrating thresholds to the bank's own business model and funding profile, and linking triggers to defined escalation actions in the contingency funding planCorrect
  2. BUsing one identical set of thresholds for all banks to ensure comparability
  3. CRelying solely on lagging indicators such as past-quarter realized outflows
  4. DSetting thresholds so wide that alerts are rarely triggered

Explanation

Effective EWIs are tailored to the institution's vulnerabilities and tied to clear escalation and response procedures. Identical thresholds ignore differing risk profiles, lagging indicators defeat the early-warning purpose, and overly wide thresholds make signals arrive too late.

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