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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 per month, an amber trigger at 20 to 39, and a red limit at 40 or more. Over the last four months the counts were 12, 18, 27 and 34. Which interpretation and response is most appropriate?

The KRI has moved into amber with a clearly worsening trend, so management should investigate root causes now, before the red limit of 40 is hit. Waiting for a breach defeats the early-warning purpose of a KRI, and the limit has not been breached, so recalibration is not warranted.

  1. AThe KRI is green throughout because no month reached the red limit, so no action is required
  2. BThe KRI is in breach of its limit and the thresholds should be recalibrated immediately
  3. CThe KRI has moved into amber with a worsening trend, so management should investigate root causes before the red limit is reachedCorrect
  4. DThe KRI is amber only in the last month, so the trend can be ignored

Explanation

The last two readings (27, 34) are in amber, and the series is rising steadily. The value of a KRI lies in prompting action before the limit is breached. Red (40) has not been reached, so no limit breach has occurred, and recalibrating thresholds would be premature.

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