Key risk indicators (KRIs) are a crucial component of treasury risk management. The first article in this series provides a high-level overview of the role KRIs can play in treasury risk management and the process for developing them. This article will provide further details for building successful KRIs and their associated limits.

One element of an effective key risk indicator that is frequently overlooked in practice is tying the metric tightly to the corporate risk appetite. That is not the only important factor. Additionally, KRIs should be quantitative, relevant, forward-looking, timely, consistent, and efficient.

Quantitative.  The first of these characteristics is straightforward: Quantitative KRIs are more useful than qualitative ones. For example, metrics expressed as percentages, ratios, or numerical values are easier to use—and to compare with risk limits and industry standards—than are general descriptions such as "high risk," "medium risk," and "low risk." Qualitative descriptions may increase subjectivity and bias around whether the current level of risk is acceptable.