Learning Objectives: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures. Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve). Discuss the applications of EWIs in the context of the liquidity risk management process.
Questions:
25.2.1. A central bank is conducting a stress test on a group of commercial banks to assess their financial stability. The regulator tracks several Early Warning Indicators (EWIs) to detect potential distress in the banking sector.
You’ve been given the following historical EWI data for three banks over the last 12 months:
Which bank shows the highest signs of financial distress?
a. Bank A
b. Bank B
c. Bank C
d. Bank D
25.2.2. A globally significant financial institution has observed the following developments over the past week:
Based on regulatory EWI guidelines (OCC, BCBS, Federal Reserve), how should the bank prioritize and respond to these signals?
a. Immediate liquidity stress testing and enhanced counterparty communication to assess short-term funding stability while monitoring regulatory thresholds.
b. Delay recognizing the issues publicly to prevent panic while gradually adjusting liquidity buffers and modifying stress test assumptions.
c. Liquidate non-core assets immediately to rebuild short-term liquidity, even if asset sales occur at distressed prices.
d. Seek emergency liquidity assistance from the central bank before other funding measures are explored.
25.2.3. Forever Bank recently faced regulatory scrutiny regarding its liquidity management practices. As the newly appointed Chief Risk Officer, you must strategically leverage Early Warning Indicators (EWIs) to strengthen the bank’s Liquidity Risk Management (LRM) framework.
Considering the following scenarios, in which would the implementation and active monitoring of EWIs be most critical?
a. In a year, the bank's reliance on short-term wholesale funding has risen sharply, comprising 40% of total liabilities.
b. Over 6 months, the Bank’s commitments relating to unused client credit lines extended to customers have increased from $1.2 billion to $2 billion.
c. The bank’s credit spreads on its bonds have widened from 150 to 160 basis points.
d. The bank’s Liquidity Coverage Ratio (LCR) has dropped below the regulatory minimum of 100%.
Answers here:
Questions:
25.2.1. A central bank is conducting a stress test on a group of commercial banks to assess their financial stability. The regulator tracks several Early Warning Indicators (EWIs) to detect potential distress in the banking sector.
You’ve been given the following historical EWI data for three banks over the last 12 months:
Which bank shows the highest signs of financial distress?
a. Bank A
b. Bank B
c. Bank C
d. Bank D
25.2.2. A globally significant financial institution has observed the following developments over the past week:
- Deposit Outflows: A 12% decline in corporate deposits, concentrated among large institutional clients.
- Funding Market Signals: A 40 bps increase in the bank’s senior unsecured debt spreads and widening credit default swap (CDS) spreads.
- Regulatory Liquidity Metrics: Liquidity Coverage Ratio (LCR) has dropped from 120% to 105% due to increased reliance on short-term wholesale funding.
- Counterparty Behavior: Prime brokerage clients have increased margin demands, while some counterparties have reduced unsecured credit exposure.
- Public Perception & Market Reaction: Multiple media reports speculate about the bank’s liquidity position, leading to stock price volatility.
Based on regulatory EWI guidelines (OCC, BCBS, Federal Reserve), how should the bank prioritize and respond to these signals?
a. Immediate liquidity stress testing and enhanced counterparty communication to assess short-term funding stability while monitoring regulatory thresholds.
b. Delay recognizing the issues publicly to prevent panic while gradually adjusting liquidity buffers and modifying stress test assumptions.
c. Liquidate non-core assets immediately to rebuild short-term liquidity, even if asset sales occur at distressed prices.
d. Seek emergency liquidity assistance from the central bank before other funding measures are explored.
25.2.3. Forever Bank recently faced regulatory scrutiny regarding its liquidity management practices. As the newly appointed Chief Risk Officer, you must strategically leverage Early Warning Indicators (EWIs) to strengthen the bank’s Liquidity Risk Management (LRM) framework.
Considering the following scenarios, in which would the implementation and active monitoring of EWIs be most critical?
a. In a year, the bank's reliance on short-term wholesale funding has risen sharply, comprising 40% of total liabilities.
b. Over 6 months, the Bank’s commitments relating to unused client credit lines extended to customers have increased from $1.2 billion to $2 billion.
c. The bank’s credit spreads on its bonds have widened from 150 to 160 basis points.
d. The bank’s Liquidity Coverage Ratio (LCR) has dropped below the regulatory minimum of 100%.
Answers here:
