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Key Risk Indicators

Understand the significance of Key Risk Indicators in managing investment risks effectively. Learn how to identify, categorize, and utilize KRI's to predict potential hotspots, drive behavior, and establish risk appetite.

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Key Risk Indicators

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  1. Key Risk Indicators FIDUCIARY INVESTMENT RISK MANAGEMENT ASSOCIATION NATIONAL CONFERENCE April 6-10, 2008 ORLANDO Presented by Sally Miller, Director, Center for Securities, Trust, and Investment AMERICAN BANKERS ASSOCIATION and Debbie Austin, VP Fiduciary Compliance Manager, PNC Bank

  2. KEY RISK INDICATORS • What are they? • Tools that provide management a barometer of tolerable levels of risk • Early warning signals • Measures of change • Tool to measure risk causes

  3. KEY RISK INDICATORS • Why are they important • Predict potential hotspots • Drive behavior via limits/targets • Regulatory focus • Establishes risk appetite

  4. KEY RISK INDICATORS • Identifying Key Risk Indicators • Include Business Units, expert staff, Senior Management, Technology, Compliance, Risk and Internal Audit • Focus on key areas • Support risk monitoring • Support decision making

  5. KEY RISK INDICATORS • Build the framework • Not as easy as it sounds • KRI’s should be meaningful • Define category and factors • Clear definition/hypothesis: what is being measured? • Type of indicator: risk, performance, leading, lagging, control • Source/Detail • Meaningful thresholds

  6. KEY RISK INDICATORS • Categories • People • Fiduciary • Audit/Exams • Legal • Fraud • Service Providers • Pricing • Asset Management • Affiliates

  7. KEY RISK INDICATORS • Categories • People - Technology • Fiduciary - Compliance • Audit/Exams - New Initiatives • Legal - AML & BSA • Fraud • Service Providers • Pricing • Asset Management • Affiliates

  8. KEY RISK INDICATORS • Indicators • #of open audit, regulatory and compliance issues • Client complaints • Revenue and Expense Streams • # of accounts closing (service, fee, performance issues) • Overdrafts • Trade errors • Other dollar losses

  9. KEY RISK INDICATORS • Indicators cont. • Regulatory capital • Account reviews not completed • Portfolio guideline exceptions • Proprietary Product Performance • Pending and open litigation • Employee turnover • Unpriced assets • Reconciling items greater than 180 days

  10. KEY RISK INDICATORS • FIRMA Trust Company Example • KRI’s monthly by quarter • Leading, Lagging and Concurrent • Established and agreed upon thresholds • Green, Yellow, Red indicator system • Information obtained from lob

  11. KEY RISK INDICATORS • FIRMA Trust Company Example • Automated information gathering • Risk Metrics Tracking • Include Action Plans • Functional and Environmental KRI’s

  12. FIRMA TRUST COMPANY Fiduciary and Investment Key Risk Indicators 1st Quarter 2008 Fiduciary and Investment Risk Report • Contents: • Overall Rating Page 1 • 1. Functional Indicators Page 2 • 2. Environmental Indicators Page 4

  13. Overall Rating Page 1 Enterprise-wide Risk Management Assessment Trend Functional Indicators Conclusions Environmental Indicators Conclusions Residual Risk Fiduciary and Investment Risk Overall, the inherent risk trend is Stable • Definitions: • GREEN Residual Risk: Risk exposure is effectively and efficiently managed to FIRMA’s established risk appetite. • YELLOW Residual Risk: Risk exposure is within the upper limits of FIRMA’s risk appetite. Management action may be warranted. • RED Residual Risk: Risk exposure exceeds FIRMA’s risk appetite and immediate response is warranted. • Inherent Risk Trend: Provides a current assessment of how the inherent risk is expected to move over the next quarter, but does not • necessarily indicate a residual risk level change. • Risk Management Assessment: Indicates how well the current risk management infrastructure manages inherent risk. 2nd Quarter 2008 Outlook: • Examinations: • Acquisition Issues: • New Systems:

  14. Functional Indicators Page 2

  15. 1. Functional Indicators (continued) Page 3 COLOR

  16. 2. Environmental Indicators Page 4 COLOR

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