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FRM Part II · FRM Exam Part II · Risk Identification

A bank sets a KRI for failed trade settlements per 1,000 trades with a green zone below 4, an amber zone from 4 to 7 inclusive, and a red zone above 7. Over four months the readings are 3, 5, 6, 8. Which interpretation and response is most appropriate?

The final reading of 8 exceeds the red threshold of 7, so it should be escalated under the threshold framework, and the rising trend through amber should be investigated. Ignoring the breach or widening thresholds merely to avoid red would defeat the purpose of the indicator.

  1. AThe indicator is red in the final month; escalate per the threshold framework and investigate the trend that moved it through amberCorrect
  2. BThe indicator remained green throughout, so no action is needed
  3. COnly the first reading matters because thresholds apply to the initial month
  4. DThe thresholds should be widened immediately so the final reading returns to amber

Explanation

The readings moved from green (3) to amber (5, 6) and then red (8, above 7). A red breach requires escalation, and the upward trend through amber should have triggered earlier attention. Widening thresholds to avoid a breach undermines the KRI's purpose.

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