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

A bank's operational risk team sets a key risk indicator (KRI) for unreconciled nostro items with an amber threshold of 50 items and a red threshold of 100 items. Which design feature would make this KRI most useful as an early-warning tool rather than a record of past losses?

A KRI works as an early-warning tool when it tracks a driver of operational risk, such as a growing reconciliation backlog, so it moves before losses happen. Metrics based on booked losses or reported annually are lagging and give no timely signal.

  1. AIt is linked to the causes of loss, such as reconciliation backlog, so it moves before losses occurCorrect
  2. BIt is calculated only after losses are booked in the general ledger
  3. CIt is reported annually together with the financial statements
  4. DIt counts only losses above the regulatory reporting threshold

Explanation

Effective KRIs are forward-looking metrics tied to drivers of risk, so breaches signal rising exposure before loss events materialise. Metrics built from booked losses, or reported infrequently, are lagging and cannot give early warning.

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