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:
20.4.1. Liquidity Early Warning Indicators (EWI) can be compared to an automobile's dashboard signal system where the appearance of a red light points our attention to something that may become a problem if not addressed. Each of the following is a credible red indicator (aka, red flag) in a Liquidity Early Warning Indicator (aka, Liquidity EWI) dashboard EXCEPT which is not a red (red flag) liquidity indicator?
a. Narrowing debt/CDS spreads
b. Sudden increase in debt costs
c. Sudden growth in assets accompanied by volatile liabilities
d. Rapid decline in the weighted average maturity of liabilities
20.4.2. Venkat writes that "The EWI framework can be summarized as M.E.R.I.T" where the (M) refers to measures. Which of the following is a TRUE characteristic (or feature) of good Early Warning Indicator (EWI) measures?
a. Only internal but not external measures
b. Forward-looking and not too coarse (i.e., granular) measures
c. Measures are disassociated (aka, de-linked) from the escalation process
d. Measures are tracked during business-as-usual environments but should not be affected by stressed environments
20.4.3. Venkat explains that firms often use a stoplight system to manage their thresholds: "Firms generally use a stoplight system in representing and communicating their performance against the thresholds of their EWIs. A green indicator means that the measure is within normal bounds. A measure that is classified as amber according to the threshold framework should be investigated further while a red indicator should be a source for significant concern and may warrant an immediate response."
Which of the following is the BEST way to start the exercise of calibration of these thresholds?
a. Thresholds are ultimately subjective
b. Historical data can inform the calibration of thresholds
c. Practitioners observe that this stoplight system is obsolete and ineffective such that thresholds are moot
d. The firm should rely on the specific regulatory instructions, in particular, BCBS 2008, for calibration of the thresholds
Answers here:
Questions:
20.4.1. Liquidity Early Warning Indicators (EWI) can be compared to an automobile's dashboard signal system where the appearance of a red light points our attention to something that may become a problem if not addressed. Each of the following is a credible red indicator (aka, red flag) in a Liquidity Early Warning Indicator (aka, Liquidity EWI) dashboard EXCEPT which is not a red (red flag) liquidity indicator?
a. Narrowing debt/CDS spreads
b. Sudden increase in debt costs
c. Sudden growth in assets accompanied by volatile liabilities
d. Rapid decline in the weighted average maturity of liabilities
20.4.2. Venkat writes that "The EWI framework can be summarized as M.E.R.I.T" where the (M) refers to measures. Which of the following is a TRUE characteristic (or feature) of good Early Warning Indicator (EWI) measures?
a. Only internal but not external measures
b. Forward-looking and not too coarse (i.e., granular) measures
c. Measures are disassociated (aka, de-linked) from the escalation process
d. Measures are tracked during business-as-usual environments but should not be affected by stressed environments
20.4.3. Venkat explains that firms often use a stoplight system to manage their thresholds: "Firms generally use a stoplight system in representing and communicating their performance against the thresholds of their EWIs. A green indicator means that the measure is within normal bounds. A measure that is classified as amber according to the threshold framework should be investigated further while a red indicator should be a source for significant concern and may warrant an immediate response."
Which of the following is the BEST way to start the exercise of calibration of these thresholds?
a. Thresholds are ultimately subjective
b. Historical data can inform the calibration of thresholds
c. Practitioners observe that this stoplight system is obsolete and ineffective such that thresholds are moot
d. The firm should rely on the specific regulatory instructions, in particular, BCBS 2008, for calibration of the thresholds
Answers here:
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