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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank's operational risk team is selecting key risk indicators (KRIs) for its payments processing unit. Which of the following characteristics would make a KRI most useful for risk management purposes?

The most useful KRI is measurable and forward-looking, linked to a risk driver, and has predefined thresholds that trigger escalation. This lets management act before losses occur. Lagging, opaque or infrequently updated measures give little early warning and are less effective.

  1. AIt is a lagging measure that confirms losses after they have been booked in the general ledger
  2. BIt is measurable, forward-looking and linked to a risk driver, with a defined threshold that triggers escalationCorrect
  3. CIt is a composite score that blends many unrelated metrics into a single index to avoid reporting complexity
  4. DIt is based on subjective opinions collected annually so that results remain stable year to year

Explanation

Effective KRIs are measurable, predictive of changes in risk exposure, tied to underlying drivers, and have thresholds that trigger action. Lagging loss-confirming measures give little early warning. Opaque composite indices and infrequent subjective views obscure drivers and slow response.

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