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

A bank's staff turnover KRI in its operations centre has risen sharply, but no operational losses have yet been recorded. Which classification and response is most appropriate?

Rising staff turnover is a leading indicator of possible future control failure. Management should assess lost knowledge and control coverage now. It is not a recorded loss event, does not prove controls failed, and should not be ignored just because no losses have occurred yet.

  1. AIt is a lagging indicator, so it should be ignored until losses occur
  2. BIt is a leading indicator of potential control failure, so management should assess knowledge loss and control coverageCorrect
  3. CIt is a loss event that must be reported in the loss database
  4. DIt is a control effectiveness test result that proves controls have failed

Explanation

High turnover can erode experience and weaken controls, so it signals elevated future risk before any loss. It is not a loss event, nor proof of control failure, and treating it as lagging wastes its early-warning value.

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