How to Develop Key Risk Indicators

From Open Risk Manual

How to Develop Key Risk Indicators

Key Risk Indicators are indispensable tools for Operational Risk Management. This is a brief guide on how to build a useful KRI framework based on[1]

Design Characteristics

Any piece of reliable information can in principle be used as the basis of an indicator. The broad characteristics of ‘good’ indicators are outlined in this section.

  • Practical: Indicators should be simple and relatively cost effective to collect, quality assure and distribute on a repeated basis
  • Measurable: Indicators must be capable of being measured (converted into a quantitative metric) with a high level of certainty and on a repeated basis
  • Relevant: Indicators must have relevance to what is being monitored. Establishing relevane is more important when KRI's are used directly for other risk management tasks (limits, capital etc.)
  • Timely: Ideally, indicators must be able to predict problems far enough in advance to help mitigation efforts (Lagging indicators might also be of interest for information purposes)
  • Comparable: Indicators that can be compared to independent benchmarks help establish validity
  • Verifiable: It should be possible for a third party to independently audit or validate the entire process of KRI generation

References

  1. Institute of Operational Risk, Key Risk Indicators, Nov 2010

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