Chapter 6 Key Learning Flashcards
Understand the fundamentals of the use of operational risk indicators as applied to operational risk management
Operational risk indicators are metrics that provide information on changes in an organization’s risk exposure or control effectiveness over time. They support risk monitoring and control across areas like risk identification, assessments, and implementing risk appetite frameworks. However, they only provide an indication and may not always fully accurate. Care is required in selection and governance.
Explain the role and purpose of different forms of operational risk indicators
The main types are:
* Risk indicators - track operational risk exposure levels over time
* Control indicators - assess if controls are meeting objectives
* Performance indicators - measure achievement of business targets
They overlap as failed performance or controls can increase risk. The distinction doesn’t matter - if a metric indicates operational risk it should be used.
Examine the nature and use of operational risk indicators
Effective indicators should be relevant, measurable, preventative/leading, easy to monitor, comparable, and auditable.
They can be selected top-down by senior management or bottom-up by managers. A mix is common.
There should be procedures for adding/changing indicators. The number depends on the key risks and data availability, balanced against collection/monitoring costs and management’s ability to interpret them
Describe the challenges surrounding operational risk indicators.
Key challenges include:
* Levels of reporting: Indicators should support risk monitoring/control at all decision making levels.
* Frequency: Depends on risk/indicator type and intended audience. Links to existing processes.
* Presentation: Should be user-friendly, use appropriate visual aids, be objective or judgement-based.
* Aggregation: Averaging indicators can hide outliers so additional context is essential.
