Hello everyone, my name's Aldi and welcome
to Enterprise Risk Management Academy. I believe you're familiar with the terms:
Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs), two super important tools
for measuring organizational performance and managing risk. KPIs are metrics that measure the performance
of an organisation, process, or activity. They are usually tied to specific goals or
targets and can help organisations to track progress and identify areas for improvement. For instance, a manufacturing company may
use KPIs such as production output and defect rate to measure the efficiency and quality
of its operations. KRIs, on the other hand, are metrics that
monitor and manage potential risks to an organization. They provide early warning signs of potential
issues and help organisations take proactive measures to mitigate or manage those risks. KRIs are also indicators which have high relevancy
and high probability in predicting or indicating the top or urgent risks. For example, a retail company may monitor
KRIs, such as the number of fraudulent transactions or cyber-attacks, to assess their level of
risk exposure. And you can divide those into, just say like,
3 categories--urgent, fairly, and not urgent; and you may add a range of the number of fraudulent
transactions for each category. You can also attach meaningful colours to
it. Like, for instance: RED indicates require immediate action
YELLOW means that it needs high monitoring and may need action
and GREEN basically says everything's still under control, but you might want to keep
it monitored. Now, let's take the case of a global investment
bank that has set a strategic objective of increasing profitability while managing risk
exposure. To achieve this, the bank has implemented
a risk management framework that includes a set of KPIs and KRIs. The bank uses KPIs such as return on equity,
return on assets, and net interest margin to measure its financial performance. It also tracks operational KPIs such as the
number of transactions processed and the time taken to settle trades. To manage potential risks, the bank has implemented
KRIs such as credit risk, market risk, liquidity risk, and operational risk. These KRIs are monitored using a variety of
data sources, including market data, credit ratings, and internal control testing. For instance, the bank uses credit risk KRIs,
such as the percentage of loans in default and the percentage of loan loss provisions,
to measure its exposure to credit risk. It also monitors market risk KRIs such as
value-at-risk (VaR) and stress testing scenarios to assess its exposure to market volatility. By aligning its KPIs and KRIs with its strategic
objectives, the bank has been able to develop a more effective risk management and performance
measurement framework. This has helped the bank to manage its risks
more effectively, identify areas for improvement, and ultimately achieve its strategic objective
of increasing profitability while managing risk exposure. That said, it's also important to note that
KPIs and KRIs are only effective if they are well-defined and accurately measured. So, organizations should ensure they have
a clear understanding of the metrics they are using and the data sources they are relying
on, to avoid any misinterpretation or inaccuracies. In conclusion, KPIs and KRIs are both valuable
tools for measuring organizational performance and managing risk. By aligning these metrics with your strategic
objectives and using them effectively, organizations can develop a more effective risk management
and performance measurement framework. Thanks for watching, and we hope you found
this video helpful. Don't forget to like, comment, and subscribe
for more educational content like this. We'll catch you in the next video. Cheers!
