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FRM Part II · FRM Exam Part II · Risk Governance

A bank's key risk indicator (KRI) for failed reconciliations has an amber threshold at 40 breaks per month and a red threshold at 70. Over six months, breaks were 30, 35, 45, 52, 61 and 68. The head of operations says no action is needed because the indicator has never been red. Which response best reflects good risk reporting practice?

The metric should be escalated because it has been in amber for four straight months and is rising toward the red limit. KRIs are early-warning tools, so trend and threshold proximity matter, not only red breaches. Changing thresholds or deleting the KRI would defeat that purpose.

  1. AAgree, since only red breaches require escalation
  2. BRaise the red threshold to 90 so that the metric stays green longer
  3. CEscalate because the metric has been in amber for four months with a clear rising trend approaching the red limit, and request remediation plansCorrect
  4. DRemove the KRI because it is volatile and offers little information

Explanation

Values 45, 52, 61 and 68 exceed the amber level of 40 for four consecutive months and are climbing toward 70. Effective KRI reporting uses trends and early warning, so escalation is warranted. Moving thresholds or removing the KRI undermines its forward-looking purpose.

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