Module: | MODULE B: RISK MANAGEMENT
Q413: Scenario: A bank's risk department monitors two specific metrics. Metric A tracks the "number of unexecuted trades due to system lag per day". Metric B tracks the "total financial compensation paid to customers for failed trades in the last quarter". Based on operational risk monitoring practices, consider the following statements:
1. Metric A acts as a forward-looking Key Risk Indicator (KRI) that helps predict potential future losses.
2. Metric B is a lagging indicator that reflects historical loss data rather than future risk exposure.
3. Key Risk Indicators (KRIs) are derived exclusively from historical loss data stored in the Loss Data Collection (LDC) system.
Which of the statements given above is/are correct?
2. Metric B is a lagging indicator that reflects historical loss data rather than future risk exposure.
3. Key Risk Indicators (KRIs) are derived exclusively from historical loss data stored in the Loss Data Collection (LDC) system.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Metric A (daily unexecuted trades) is an early warning signal.
It is a Key Risk Indicator (KRI), which is a forward-looking metric designed to highlight changing risk exposures before an actual financial loss materializes.
Statement 2 is correct: Metric B (compensation already paid) represents actual materialized losses.
This makes it a lagging indicator.
It tells you what went wrong in the past, but is less effective at predicting imminent future failures.
Statement 3 is incorrect: KRIs are not exclusively derived from historical loss data (LDC). While LDC informs risk profiles, true KRIs are operational metrics (like employee turnover, system downtime minutes, or transaction backlog volumes) extracted from live business environments, independent of past financial losses.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.
It is a Key Risk Indicator (KRI), which is a forward-looking metric designed to highlight changing risk exposures before an actual financial loss materializes.
Statement 2 is correct: Metric B (compensation already paid) represents actual materialized losses.
This makes it a lagging indicator.
It tells you what went wrong in the past, but is less effective at predicting imminent future failures.
Statement 3 is incorrect: KRIs are not exclusively derived from historical loss data (LDC). While LDC informs risk profiles, true KRIs are operational metrics (like employee turnover, system downtime minutes, or transaction backlog volumes) extracted from live business environments, independent of past financial losses.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.