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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank sets a KRI for staff turnover in its settlements team with an amber threshold of 10% and a red threshold of 15% annualised. Last quarter turnover was 9%, this quarter it is 12%, and the trend has risen for four quarters. Which response is most consistent with sound KRI governance?

The amber breach should be escalated to the risk owner with a required action plan, and the worsening trend monitored toward the red threshold. KRIs exist to give early warning, so waiting for red, loosening thresholds or removing the indicator would defeat their purpose.

  1. ATake no action because the indicator has never breached the red threshold
  2. BImmediately reset the amber threshold to 15% so the indicator returns to green
  3. CEscalate the amber breach to the risk owner, require an action plan, and monitor the trend toward redCorrect
  4. DRemove the indicator from reporting since it is volatile

Explanation

At 12% the KRI has breached amber, which should trigger escalation to the risk owner and an action plan with continued monitoring, especially given the adverse trend. Waiting for red defeats the early-warning purpose. Changing thresholds to avoid breaches or dropping the KRI undermines governance.

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