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FRM Part I · FRM Exam Part I · Operational Risk

A bank tracks the number of failed trade confirmations per day as a key risk indicator (KRI) with an amber threshold of 20 and a red threshold of 40. Last month the indicator rose from 12 to 27 and stayed there. What is the most appropriate interpretation and response?

The indicator is in the amber zone, which signals deteriorating control or process conditions. Because KRIs are forward-looking early warnings, management should investigate root causes and consider remediation now, rather than waiting for the red threshold or for actual losses to materialize.

  1. AThe indicator is amber, acting as an early warning, so management should investigate root causes before losses occurCorrect
  2. BThe indicator is below red, so no action is needed until the threshold of 40 is breached
  3. CThe indicator proves that operational losses have already exceeded the bank's risk appetite
  4. DThe indicator should be removed because KRIs only measure realized losses

Explanation

At 27 the KRI is above amber (20) but below red (40). KRIs are forward-looking and meant to warn of rising risk before losses crystallize, so investigation is warranted. Waiting for red wastes the early-warning value, and KRIs do not measure realized losses.

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