Module: | MODULE B: RISK MANAGEMENT
Q445: Consider the following statements regarding Early Warning Signals (EWS) within a bank's Contingency Funding Plan:
1. A robust Contingency Funding Plan must contain explicit Early Warning Signals, such as rapid deposit withdrawals or unexpected cancellations of wholesale credit lines, to preemptively activate emergency protocols.
2. Early Warning Signals are specifically designed to identify structural funding stress long before it degrades into an actual insolvency event.
3. The activation of the Contingency Funding Plan upon breaching an Early Warning Signal must be entirely manual, waiting for a formal Board of Directors meeting to initiate any response.
Which of the statements given above is/are correct?
2. Early Warning Signals are specifically designed to identify structural funding stress long before it degrades into an actual insolvency event.
3. The activation of the Contingency Funding Plan upon breaching an Early Warning Signal must be entirely manual, waiting for a formal Board of Directors meeting to initiate any response.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: A foundational element of any Contingency Funding Plan (CFP) is the establishment of clear, quantifiable Early Warning Signals (EWS). Metrics like a sudden spike in retail deposit run-offs, an increase in asset haircuts by clearinghouses, or the cancellation of wholesale funding lines act as triggers to activate emergency liquidity protocols.
Statement 2 is correct: The strategic purpose of EWS is early detection.
They act as the first line of defense, identifying brewing liquidity stress in its nascent stages, thereby giving the Asset-Liability Management Committee (ALCO) crucial lead time to intervene before the situation deteriorates into irreversible insolvency.
Statement 3 is incorrect: Waiting for a formal Board of Directors meeting to trigger a response defeats the purpose of an emergency plan.
A robust CFP explicitly outlines pre-approved, streamlined escalation matrices and delegated authorities, ensuring that the executive management can execute rapid, semi-automated responses the moment an EWS is breached without bureaucratic delays.
Statement 2 is correct: The strategic purpose of EWS is early detection.
They act as the first line of defense, identifying brewing liquidity stress in its nascent stages, thereby giving the Asset-Liability Management Committee (ALCO) crucial lead time to intervene before the situation deteriorates into irreversible insolvency.
Statement 3 is incorrect: Waiting for a formal Board of Directors meeting to trigger a response defeats the purpose of an emergency plan.
A robust CFP explicitly outlines pre-approved, streamlined escalation matrices and delegated authorities, ensuring that the executive management can execute rapid, semi-automated responses the moment an EWS is breached without bureaucratic delays.