Operational risk in finance: Are you using KRIs?
A new technical paper says that developing key risk indicators (KRIs) is essential for effective operational risk management in the finance industry.
Risk drivers are well known in many areas of the finance industry. Fraud and credit risk receive a lot of attention from analysts, as well as from governments and the public – especially when something goes wrong.
“However, large parts of operational risk in the financial services industry are not as well understood. Analysis of operational risk drivers is still immature; finding satisfactory key risk indicators constitutes a challenge for many banks” says Ariane Chapelle, the author of ‘The importance of preventative KRIs’. “Taxonomy, predictability and governance are three of the most common debates around KRIs for financial companies.”
Admittedly, KRIs overlap with KPIs and KCIs, but Chapelle notes that the overlap is most prominent in the case of failure: “[F]or example, poor technological performance such as system downtime becomes a KRI for errors and data integrity. Failed KPIs are a first pool of candidates for risk indicators.”
The paper cites examples of KRIs for financial markets activities, daily indicators for the front office and back office, as well as examples of KRIs for credit risk. They include such things as abnormal trading patterns, breaches of trading limits, number of unconfirmed deals and reversals, and number of staff without financial backgrounds. It also goes on to describe the four types of KRI candidates, in addition to transaction and monitoring phases (and their corresponding indicators).
So, even if you already deal with KPIs and KCIs, it might be time to take a new approach to operational risk and start using KRIs. It might also be time to book your place on the Buy-Side Technology & Operational Strategy conference on June 20, in New York.
With a whole host of operations and technology experts from around the US, join your peers at the buy-side event of the year. View the full speaker line-up here.