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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 characteristic most strongly supports using a metric as an effective KRI?

A good KRI is measurable and linked to a risk driver, giving early warning before losses occur. Lagging loss figures, identical metrics imposed on every unit, or annual-only reporting weaken its predictive value and timeliness for management action.

  1. AIt is a lagging measure of losses already booked in the general ledger
  2. BIt is measurable, has a documented link to a risk driver, and offers early warning before losses occurCorrect
  3. CIt is identical across all business lines so results can be aggregated without adjustment
  4. DIt is reported only annually to align with the audit cycle

Explanation

Effective KRIs are measurable, forward-looking and tied to underlying risk drivers, so management can act before losses materialize. Lagging loss data describes past events, and annual reporting or forced uniformity reduces timeliness and relevance.

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