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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank tracks the number of failed settlements per month as a key risk indicator (KRI) with an amber threshold of 20 and a red threshold of 35. Failures have risen from 12 to 28 over three months, though no loss has yet been booked. What is the most appropriate use of this KRI?

The reading of 28 is above amber (20) but below red (35), so it is an early warning that should trigger a review of the process and controls. KRIs exist to signal rising risk before losses appear, so waiting for losses or changing thresholds is wrong.

  1. AWait until losses are recorded before taking action, since KRIs only confirm losses
  2. BTreat it as an amber early warning and trigger a review of the process and its controlsCorrect
  3. CRemove the indicator because it did not predict a loss
  4. DRecalibrate the red threshold downward to 28 so that no breach is reported

Explanation

KRIs are forward-looking metrics designed to signal rising risk before losses occur. A reading of 28 lies between the amber (20) and red (35) thresholds, so escalation and review is appropriate. Waiting for losses defeats the purpose, and moving thresholds to hide a breach undermines governance.

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