How to Develop Key Risk Indicators

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

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

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