KRIs cut through the haze

Perhaps you read the title of this column and wondered, "So what's a KRI and why do I care?" To answer the first question, a KRI is a key risk indicator. KRIs offer a solution to the problem of measuring probability of loss in operational risk--and that answers the second question.

Banks are very good at measuring credit loss, where we deal with comparatively few risk factors and for which we have a comparatively large amount of data. But let's say we're talking about the risks associated with staff turnover or customer service activities. Or what about fraud, which comes in so many forms, both internally and externally? What resources do we have to measure the effectiveness of our loss-prevention measures--or to find out that we're in much worse shape than we thought? We need key risk indicators, and we need data.

Development of KRIs is no trivial task. It begins by listing all risk factors for any given operational area, reaching consensus on the "red-hot" risks and their definitions, agreeing on which indicators promise to be most useful and user-friendly, collecting data and creating benchmarks, and then testing against loss data. Sheer numbers challenge this endeavor--there are literally thousands of combinations of risks, risk points, and potential indicators to consider.

A landmark study, however, is making it all possible. RMA and RiskBusiness are partners in the KRI Framework Study, which is now in the second phase of its work. With the help of 50 institutions worldwide, we already have created a risk framework and risk map, held round tables in New York, London, and Hong Kong, and completed a program of 10 planned workshops, during which we identified some 1,500 risk indicators with significant potential for operational risk management.

The second phase runs through October. Then comes the third phase of the study and the payoff of benchmarking. A Web site, www.kriex.org, has been set up to inform participants and others of our work to date and to serve as a tool for participants to work on refining the definitions and specifications of the KRIs. In the third phase, the Web site will be extended to allow participants to upload and download data to make benchmarking a real-time exercise. When integrated into financial institutions' risk management processes, KRIs hold the promise of substantially lowering losses from operational risk.

This study is not only for the largest banks: Currently, the smallest participant is a bank with about $4 billion in assets and in the future we expect to include community banks as well. The November 2003 issue of The RMA Journal first introduced us to KRIs, and the recent Special Edition tells us more. Do plan to visit www.kriex.org to gain insight into the process through such Web pages as one that offers "common conundrums"--sort of a KRI FAQ contributed by Charles Taylor, RMA's director of Operational Risk (click on Public Library, then Newsletters).

So RMA's goal, in our 90th year as it was in our first, is to give Associates the complete resources they need to do their jobs better. The Special Edition, mentioned above, looks exclusively at operational risk and the tools available to manage it. Coedited by Charles Taylor and Beverly Foster, the Special Edition is a synthesis of fundamentals and the most advanced thinking in operational risk management, including key risk indicators. We're grateful to AFS as well as our other advertisers in helping to bring the Special Edition to you. Please take advantage of other RMA resources as well--eMentor[TM] (p. 76), our career development offerings (p. 44), this month's Retail Risk Management Conference (p. 90), and the 2004 RMA Annual Risk Management Conference (next page), among others.

In the next issue of The RMA Journal, you will be hearing from your new chairman for 2004-05, Richard L. Harbaugh, president and CEO of Equitable Federal Savings Bank, a community bank in Grand Islands, Nebraska. We look forward to having Rick help us sharpen even further our focus on community banks--a very important segment of our membership.

COPYRIGHT 2004 The Risk Management Association
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