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Pick out the EWI guidance issued by banking regulators and supervisors, namely the OCC, the BCBS and the Federal Reserve.

FRM® Part II · Liquidity and Treasury Risk Measurement and Management · Early Warning Indicators · FRM2.LTR.3.b

The idea

Know which authority issued which guidance. The Basel Committee on Banking Supervision (BCBS) is the international standard setter. Its 2008 Principles for Sound Liquidity Risk Management and Supervision expect banks to monitor early warning indicators of emerging stress, both quantitative and qualitative, bank-specific and market-wide, and to link them to the contingency funding plan (CFP). In the United States, the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the FDIC, with other agencies, issued the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management. The OCC's Comptroller's Handbook booklet on liquidity gives examiners further detail. Typical examples include negative publicity, rating downgrades, widening CDS spreads, falling equity prices, rapid asset growth funded by volatile liabilities, rising collateral demands and deposit outflows. The BCBS sets standards, and national supervisors apply them. Exam point: all expect EWIs tied to the CFP.

A practice question

From the question bank, with the reason each wrong option is wrong.

Which supervisor publishes the Comptroller's Handbook booklet on liquidity that examiners use for national banks?

  1. The Basel Committee on Banking SupervisionWhy not: The BCBS is a standard setter in Basel; it does not examine banks or publish handbooks for national banks.
  2. The Federal Reserve BoardWhy not: The Fed supervises state member banks and holding companies; the Comptroller's Handbook is the OCC's publication.
  3. The Financial Stability BoardWhy not: The FSB coordinates international regulatory policy and has no examiner handbooks for US national banks.
  4. The Office of the Comptroller of the Currency - correct

The Comptroller of the Currency heads the OCC, the primary federal supervisor of national banks, and the Comptroller's Handbook series is its examination guidance.

A harder one

Which development would supervisory EWI guidance most clearly treat as a warning sign of emerging liquidity stress at a bank?

  1. A widening CDS spread together with negative press coverage of the bank's funding - correct
  2. A narrowing of the bank's CDS spread following a recent rating upgrade by an agencyWhy not: Sign reversed: a narrowing spread signals improving market confidence, not a warning.
  3. A lengthening of the average maturity of the bank's wholesale funding liabilitiesWhy not: Longer maturities reduce rollover risk, so this is an improvement; the direction has been misread.
  4. An increase in the stock of unencumbered high-quality liquid assets held by the bankWhy not: A larger unencumbered buffer strengthens liquidity and is not a warning sign.

Guidance lists signals such as negative publicity, widening CDS spreads, downgrades, falling equity prices, rapid asset growth funded by volatile liabilities, and rising collateral demands. The other options all describe improvements.

The hardest tier

A US national bank's treasurer is mapping the EWI guidance that applies to the bank. Which statement is most accurate?

  1. BCBS principles are US law and apply directly to national banks without any need for implementation by the OCCWhy not: The BCBS has no legal authority; its standards take effect only through national supervisors.
  2. The interagency policy statement applies only to banks above USD 250 billion in assets, as smaller banks are exemptWhy not: It applies to insured depository institutions generally, with expectations scaled to size and complexity; it has no such threshold.
  3. Because the Federal Reserve is the federal regulator of national banks, OCC guidance is irrelevant to them in practiceWhy not: The OCC, not the Federal Reserve, is the primary federal supervisor of national banks.
  4. BCBS principles are international expectations implemented nationally; US expectations come through the OCC and the interagency statement - correct

The BCBS sets international standards that members implement nationally. For a national bank, the OCC is the primary federal supervisor, and the 2010 Interagency Policy Statement and OCC handbook are the practical sources of EWI expectations.

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