FRM Part I · FRM Exam Part I · Operational Risk
A bank monitors the number of failed trade settlements per month and sets an amber threshold at 40 and a red threshold at 60. The indicator reads 52 this month, up from 35 last quarter. Which action is most consistent with sound use of key risk indicators (KRIs)?
The indicator is in the amber zone and rising, so it should be escalated for cause analysis and remediation. KRIs are early-warning tools, so waiting for red wastes their value. Widening thresholds or swapping indicators to avoid amber would hide the deterioration rather than control it.
- ATake no action because the red threshold has not been breached
- BEscalate to management for review of the cause and remediation, since the indicator is in the amber zone and trending upCorrect
- CReset the thresholds to 60 and 80 so the indicator returns to green
- DReplace the indicator with one that has historically been stable
Explanation
At 52 the indicator is above the amber threshold of 40 but below red at 60, and the trend is worsening. KRIs exist to give early warning, so amber should trigger escalation and investigation. Moving thresholds merely to restore green defeats the purpose.
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