What should a contingency funding plan include and how are escalation triggers designed?

A Contingency Funding Plan (CFP) is a predefined action plan that a bank activates when facing actual or potential liquidity stress. It bridges the gap between normal liquidity management and crisis — laying out exactly what to do, who decides, and in what order as conditions deteriorate.

Key Components of a CFP:

1. Governance and Roles:

• Identify the Liquidity Crisis Management Team (LCMT)
• Define authority levels — who can activate each stage?
• Establish communication protocols (internal and external)
• Assign responsibilities: treasury, risk, communications, legal, trading desks

2. Early Warning Indicators (EWIs):

EWIs are metrics that signal deteriorating liquidity conditions before a full crisis develops:

3. Staged Escalation Framework:

4. Action Menus by Stage:

Each stage has predefined actions with estimated liquidity impact:

• Stage 1: Increase daily monitoring, review maturing wholesale funding, pre-position collateral at central bank, reduce new lending commitments
• Stage 2: Sell Level 2 HQLA, draw down committed credit facilities, reduce discretionary outflows, begin communicating with key depositors
• Stage 3: Sell Level 1 HQLA, access central bank standing facilities, implement deposit retention programs, notify regulators
• Stage 4: Emergency asset sales (accept fire-sale prices), request emergency central bank assistance, implement full communication strategy

5. Quantification:

For each action, estimate:

• Liquidity generated ($ amount)
• Time to execute (hours/days)
• Cost (spread widening, P&L impact)
• Dependencies (market conditions, counterparty willingness)

6. Testing:

CFPs must be tested regularly (at least annually) through:

• Tabletop exercises with the LCMT
• Simulation exercises using historical or hypothetical scenarios
• Testing of operational readiness (can you actually sell $5B of Treasuries in 4 hours?)

Exam Tip: FRM II tests the multi-stage nature of CFPs, the concept of early warning indicators, and the progression from monitoring to action as conditions worsen.

Practice liquidity contingency planning in our FRM community.