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

A bank tracks the number of unreconciled payment items at each month end and sets amber and red thresholds, escalating to senior management when the red level is breached. The primary purpose of this metric is to:

The metric is a key risk indicator, and its main purpose is to give a forward-looking early warning of rising risk exposure or weakening controls. Thresholds trigger escalation before losses occur. It does not capture realized losses, determine regulatory capital, or replace independent control testing.

  1. ACalculate regulatory capital under the standardized approach
  2. BProvide a forward-looking signal of changes in risk exposure or control weaknessCorrect
  3. CRecord actual losses for the internal loss database
  4. DReplace the need for control testing by internal audit

Explanation

This is a key risk indicator. KRIs with thresholds act as early warning signals of rising risk or deteriorating controls. They do not measure realized losses, set capital, or substitute for independent assurance.

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