What are Key Risk Indicators?
Key Risk Indicators (KRIs) are used to monitor the main drivers of exposure associated with key risks. Performance indicators, often referred to as Key Performance Indicators (KPIs), provide insight into the status of operational processes, which may, in turn, provide insight into operational weaknesses, failures, and potential loss.
These indicators/factors are mostly quantitative and are used as a proxy for the quality of the control environment of a business. For example, in order to report the quality of the processing systems of an investment bank, we might design factors such as “system downtime” (measuring the number of minutes that a system stayed offline), and “system slow time” (counting the minutes that a system was overload and running slow). These KRIs can be extremely important in Op Risk measurement as they can allow Op Risk models to behave very similarly to those in market and credit risks.
Why are they important?
They are important predictors of negative events that might have a negative influence on businesses. They track changes in risk exposure levels and contribute to early warning indications that allow businesses to report concerns, prevent crises, and manage them quickly.