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

Which practice best reflects regulatory guidance on use of central bank facilities within a bank's contingency funding plan?

A bank should understand the central bank facilities' eligibility, collateral and operational requirements and be ready to use them, for example by pre-positioning collateral, but treat them as a backstop rather than a primary funding source. Both total reliance and total exclusion are inconsistent with guidance.

  1. AAssuming central bank borrowing will cover any shortfall, so no other measures are needed
  2. BExcluding any mention of central bank facilities because they signal weakness
  3. CUnderstanding the facilities' eligibility, collateral and operational requirements, and pre-positioning collateral, while not treating them as a primary funding sourceCorrect
  4. DDrawing on the facility frequently in normal times to demonstrate operational readiness regardless of cost

Explanation

Guidance expects banks to understand access conditions and be operationally ready, such as pre-positioned collateral, but central bank facilities are a backstop, not a primary or assured source. Assuming they cover everything or ignoring them are both flawed. Routine drawing is not required and may create stigma and cost.

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