Chapter 6 Learning Outcomes

Question 1

What is the difference between a risk indicator and a control indicator?

Answer 1

A risk indicator is a metric that provides information on the changing nature of operational risk exposure over time. A control indicator provides information on the extent to which a given control is meeting its intended objectives at a specific point in time

(Section 6.1.1 and 6.1.2)

Question 2

What is the purpose of tracking risk and control indicators?

Answer 2

The purpose is to support the monitoring and control of operational risk in areas like risk identification, risk assessments, and implementing effective risk appetite and governance frameworks. However, indicators only provide an indication and may not always be fully accurate.

(Introduction)

Question 3

What does a “good” risk indicator look like

Answer 3

A good indicator is relevant, measurable, preventative/leading, easy to monitor, comparable, and auditable.

(Section 6.2.1)

Question 4

How do you select risk indicators?

Answer 4

Using a top-down approach starting from senior management or a bottom-up approach allowing managers to choose their own indicators. Usually a combination is used.

(Section 6.2.2)

Question 5

What is the benefit of leading indicators versus lagging?

Answer 5

Leading indicators are predictive and provide early warning, allowing preventative action. Lagging indicators rely on past data so only indicate what has already happened.

(Section 6.3.3)

Question 6

How can the results of risk indicators be reported?

Answer 6

In risk indicator reports tailored to different levels of management from governing body to individual business lines. Reports can be objective/quantitative or judgment based.

(Section 6.3.1 - 6.3.3)

Question 7

What does threshold and limit mean in relation to risk indicators?

Answer 7

A threshold is a value which, when exceeded, requires investigation or corrective action. A limit is a maximum tolerable value.

(Section 6.2.5)

Question 8

How do risk indicators link to risk appetite?

Answer 8

The limits and thresholds assigned to risk indicators express an organisation’s appetite for operational risk. More conservative thresholds imply lower risk appetite.

(Section 6.2.5)