FRM Part II · FRM Exam Part II · Risk Identification
A bank's operational risk team wants an indicator that signals rising risk exposure before losses are recorded in the loss database. Which of the following is the best example of such a forward-looking key risk indicator (KRI)?
Staff turnover in the payments unit is the best forward-looking KRI because it measures a driver of future errors and control weakness. Booked losses, fines paid and closed incidents are lagging outcomes that reveal problems only after they have already happened.
- ATotal operational losses booked in the previous quarter
- BStaff turnover rate in the payments operations unitCorrect
- CAggregate regulatory fines paid during the past year
- DNumber of loss events closed by the incident team last month
Explanation
KRIs are metrics that act as early warnings of changes in risk drivers. Staff turnover reflects a cause of future errors and control failures. The other options are lagging measures of outcomes that have already occurred, such as losses and fines, or measure the incident team's activity.
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