FRM Part II · FRM Exam Part II · Risk Identification
An operational risk team at a bank is selecting indicators to monitor its payments-processing unit. Which of the following best describes a key risk indicator (KRI) that is forward-looking?
Staff turnover and unfilled critical positions are the forward-looking KRI because they indicate deteriorating conditions that can cause future losses. Booked losses, confirmed fraud events and past fines are lagging indicators that only describe events that have already happened.
- ATotal operational losses booked in the previous fiscal year
- BStaff turnover rate and the number of unfilled critical positions in the unitCorrect
- CNumber of fraud events confirmed and written off last quarter
- DRegulatory fines paid during the past three years
Explanation
Forward-looking KRIs signal changes in conditions that may lead to future losses; rising staff turnover and vacancies increase the chance of errors and control lapses. The other options are historical loss outcomes (lagging measures), which report what has already occurred.
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