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FRM Part II · FRM Exam Part II · Risk Identification

A bank sets a KRI for failed trade settlements with a green threshold below 20 fails per week, amber from 20 to 39, and red at 40 or more. Weekly fails have been 12, 18, 24, 31, 37 over five weeks, with no losses yet. What is the most appropriate risk management response?

The team should escalate and investigate root causes, because the fails have risen from green into amber and are trending toward the red limit. KRIs exist to trigger action before losses occur, so waiting for red or loosening thresholds would defeat their purpose.

  1. ATake no action because no losses have occurred and the indicator is still below red
  2. BReset the thresholds upward so the indicator returns to green
  3. CEscalate to management and investigate root causes because the trend is deteriorating toward the red thresholdCorrect
  4. DRemove the KRI since it has not predicted any loss

Explanation

The KRI has moved from green to amber and is rising steadily toward red. The value of a KRI lies in prompting action before losses emerge, so root-cause investigation and escalation are appropriate. Resetting thresholds merely hides the signal, and absence of loss does not mean the indicator has failed.

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