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FRM Part II · FRM Exam Part II · Risk Reporting

A bank uses a key risk indicator (KRI) for unreconciled payment breaks with thresholds: green below 40 breaks, amber 40 to 59, red 60 or more. Month-end counts for the last four months were 28, 36, 47 and 55. Which reporting conclusion is MOST appropriate?

The breaks have risen every month from 28 to 55 and are only five below the red threshold of 60. Because KRIs are leading indicators, the report should flag this adverse trend and prompt preventive action now rather than waiting for a red breach.

  1. ANo action is needed, since the indicator is still amber and not red
  2. BThe indicator is rising steadily and approaching the red threshold, so the report should flag the adverse trend and prompt preventive action nowCorrect
  3. CThe KRI is unreliable because it changes every month
  4. DThe indicator should be dropped from reporting until it reaches red

Explanation

The counts show a rising trend (28, 36, 47, 55) that moved from green to amber and is 5 short of red at 60. KRIs are meant to be leading indicators, so the report should highlight the trajectory and trigger preventive action before the breach. Waiting for red wastes the early-warning value.

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