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FRM Part II · FRM Exam Part II · Risk Governance

A bank's key risk indicator (KRI) for failed settlements has amber and red thresholds of 40 and 60 failures per month. Over six months, failures were 32, 38, 45, 52, 58 and 66. The head of operations argues no action is needed until the red threshold is breached. Which response best reflects good KRI governance?

The issue should be escalated now with an owner and action plan. Amber was breached in month three and failures are rising steadily, so the indicator is signalling deteriorating controls. KRIs exist as early warnings, so waiting for red or loosening thresholds undermines their purpose.

  1. AAgree, since thresholds exist precisely to trigger action only at red
  2. BEscalate now because the amber breach in month three and the steady upward trend indicate deteriorating controls, requiring an owner and action plan before the red breachCorrect
  3. CRaise the thresholds to 50 and 70 to reduce false alarms
  4. DRemove the indicator because it is a lagging measure

Explanation

Amber was breached in month three and failures rise every month, so the metric is trending toward red. KRIs are meant to be forward-looking early warnings, so escalation with accountable ownership is required. Loosening thresholds after the fact would defeat the purpose.

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