Operational Risk Management, 2nd Edition

CHAPTER 9Key Risk Indicators

This chapter explores the benefits and challenges of the use of metrics in the operational risk (OR) framework. Metrics can provide the business environment and internal control factors (BEICF) needed for an AMA capital approach, but more importantly, they can provide insight into the changing operational risk environment.

KEY RISK INDICATORS

Key risk indicators, or KRIs, are used in the operational risk framework to keep a finger on the pulse of the changing risk environment. External risk factors, internal risk factors, and the control environment can be monitored using metrics.

In Basel II, there is a requirement for Advanced Measurement Approach (AMA) banks to collect BEICF for use in the capital model. These BEICF have proved elusive and capital models have struggled with how to incorporate them. The use of BEICF in capital modeling is discussed later in Chapter 12.

However, it is common sense that monitoring our environment and our controls will lead to better operational risk management, regardless of their use in the capital model, and all firms attempt to develop a key risk indicator (KRI) structure of some kind. Some are highly sophisticated; some are simple.

In fintechs it is common for the strategic business plan to be monitored by objectives and key results (OKRs), and aligning operational risk KRIs to these OKRs is an effective way to embed a strong risk culture.

KRIs are an important pillar in the operational risk framework, as ...