Explanation

Option A is the correct answer because:

• Narrowing debt/CDS spreads indicates improving credit conditions and reduced perceived risk by the market
• When debt spreads narrow, it means investors are demanding lower risk premiums, suggesting the bank's creditworthiness is improving
• This is typically a positive signal, not a red flag for liquidity problems

Why Option B is a red flag:

• Sudden increase in debt costs signals that lenders perceive higher risk and are demanding higher compensation
• This indicates deteriorating market confidence and potential funding difficulties
• Higher borrowing costs directly impact liquidity by making funding more expensive and potentially less available

In liquidity early warning systems, red flags typically include:

• Widening credit spreads
• Increasing funding costs
• Declining stock prices
• Credit rating downgrades
• Counterparty withdrawal
• Negative news coverage

Narrowing spreads represent improving conditions and are therefore NOT red flags.