Identifying potential threats is essential for financial institutions. Internal and external business conditions are continually evolving, impacting an institution’s stability and success. The challenge lies in knowing what exactly to look for.
This is where Key Risk Indicators (KRIs) come in.
KRIs are clearly defined metrics that identify and predict potential risk. They help banks and other financial institutions understand and evaluate risk levels across the organization, a line of business, or a department.
Key risk indicators examples include:
Key risk indicators are a bank’s early warning system. These carefully selected metrics serve as a barometer for risk, signaling changes in risk exposure throughout the institution. They help identify when a risk is trending in the wrong direction and act as an alert system.
By identifying risks early on, banks can:
Proper use of KRIs can potentially save a bank from severe financial losses, operational disruptions, reputation damage, or even compliance violations. KRIs help banks address risks proactively, enhancing strategic decision-making, operational efficiency, and long-term sustainability.
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Now that we know what KRIs are, let’s look at some KRI examples for banks and the types of risk they address.
Remember, the most effective KRIs are those tailored to the specific institution's risk profile, business model, and strategic objectives.
An institution needs a combination of both experience and exposure KRIs. These allow an institution to understand inherent risk and residual risk.
Lagging, leading, and current KRIs are ideal tools for this assessment.
Lagging or current KRIs are also known as experience KRIs. These look backward instead of toward the future. They can be effective in revealing events that may have initially been hidden from view. An example might include the number of errors as a percentage of total transactions. In other words, they aren’t obvious until you combine the factors.
A current KRI reflects a point-in-time change in the level of exposure to the applicable risk. Current KRIs are typically those relating to “real time” monitoring of performance, for example system downtime or system capacity usage.
A lagging KRI reflects the level of exposure to the applicable risk that has already occurred (e.g., operational losses.)
Leading or exposure KRIs are forward-looking in nature and allow an institution to proactively identify a situation of heightened risk. They are predictive in nature. A loss may not have been experienced yet, but the change in the metric over time may indicate a higher level of exposure to risk. Examples include rising interest rates on potential credit issues or policy exceptions on accounts opened without enhanced due diligence.
Good key risk indicators should simplify risk without being simplistic. They should be objective and easy to understand. They should be developed using consistent methodologies and standards so
that everyone throughout the institution understands:
One way to gauge metrics is to determine if they are SMART.
Smart stands for:
Sustainable. Sustainable KRIs are cost effective to collect and repeatable.
Measurable. Measurable KRIs are quantifiable (ex: percent, ratio, amount or count) and able to be benchmarked either internally or externally.
Actionable. Actionable KRIs guide decision making and management action.
Relevant. Relevant KRIs are clearly aligned to risk.
Timely. Timely KRIs can be consistently measured over time to recognize trends.
As powerful as KRIs are, they only provide value if used correctly. Each KRI should have a predefined threshold that triggers action when exceeded.
These thresholds should be based on the bank's risk appetite, industry benchmarks, historical data, and the potential impact on the bank's operations or reputation.
It’s important to monitor and report on KRIs so that the bank knows when corrective action is needed. Many institutions choose to report KRIs visually, representing risk urgency with the colors of a stoplight.
It's also vital to monitor KRI trends over time. A single month's data might not provide much insight, but looking at the KRI over a period can indicate whether a risk is increasing, decreasing, or remaining steady.
KRIs can also be paired with key performance indicators (KPIs) and other indicators to better understand your institution’s risk exposure – and help determine if you’re taking on the right amount of risk in pursuit of reward.
With the multitude of risks that financial institutions face, managing them manually can be a daunting task. This is where our enterprise risk management software comes into play. It enables banks and other financial institutions to effectively track and manage their KRIs, helping them to identify potential risks early, take timely action, and make informed decisions.
Nrisk is an invaluable ally for tracking KRIs. An integrated enterprise risk system that enables banks and other financial institutions to measure potential impacts and manage risk from a position of powerful preparedness, Nrisk helps automate the process of tracking and analyzing KRIs, providing a real-time, comprehensive view of an institution's risk landscape.
With our software, you can:
KRIs are strategic tools that provide invaluable insights into an organization's risk profile – empowering financial institutions to proactively manage risks and protect their assets, reputation, and stakeholders. Understanding what KRIs are and effectively leveraging them will help ensure your institution's success and resilience in a constantly evolving financial environment.
With the right approach to KRI selection, monitoring, and the power of technology, banks can transform their risk management into a strategic asset – maximizing the value of this important tool.
“This [Risk Performance Management] suite [including Nrisk] offers things like key risk indicator (KRI) and key performance indicator (KPI) tracking, which can be tracked from an organizational risk standpoint and used by different teams to reduce risk across the organization. These are the types of tools in the software that allow different departments to engage with one another.”
- Senior Vice president of Integrated Risk at $6 billion-asset credit unions
Ready to see how Nrisk can help you elevate your use of KRIs? Schedule a demo with us today to see how our platform can help you track, analyze, and manage your organization's key risk indicators.