Picking The Right Leading And Lagging Bank KRIs

Picking the right bank KRIs can help risk managers in banking institutions increase the effectiveness of risk mitigation across the organization. Key risk indicators are a critical risk management tool for enterprise risk managers. These indicators can uncover insights into problematic processes and risky activities being practiced within the organization. They can also help a business detect problems preemptively and mitigate risks before they are actualized. KRIs can be broadly categorized into two categories; leading and lagging, and both are vital for a bank’s risk management framework.

These KRIs also provide directional guidance for executive decision makers. Banks pursue growth by looking at risk assessments and evaluations to decide which risks need to be taken for business growth. KRIs can provide real-time data on risks, ensuring that any decision that is being taken is taken while considering accurate and updated information. Key risk indicators, as the name suggests, are not risks themselves, but the factors that can indicate the rise or fall of a risk. Being able to predict risks is helpful when charting the future of the bank.

While KRIs have been employed to different degrees in the banking sector, most experts agree that their role will grow exponentially. A McKinsey report on the future of risk management outlines key risk indicators as one of the most important tools risk managers will have. Risk managers have been aware of the benefits of KRIs for a long time but were unable to effectively use them due to obstacles in data gathering and analytics, but those obstacles are no longer a problem due to advancements in risk management technology.

Leading and Lagging Bank KRIs

KRIs can be broadly categorized into leading and lagging KRIs. Both help banks in different contexts.

Lagging KRIs

Lagging KRIs are the risk indicators that help an organization discover the problem through historical trends and outcomes. Lagging indicators look at the output generated through different processes within an organization to uncover problematic areas. Lagging KRIs cannot help a bank detect upcoming problems and risks to eliminate them, but it can help a bank determine the domains that need to be audited and processes that need to be reworked.

Workplace accidents are a good lagging indicator for organizations. Businesses can look at all the incidents which caused damage to employees or the organization. This will uncover the most problematic areas in the organization. A construction company can compare accident data across all its construction sites to determine which ones need safety interventions and an overhaul of safety rules and trainings.

Losses incurred due to unexpected risk actualizations is a good lagging indicator for banks. Banks can easily keep track of the losses incurred because of operational or structural failures over the past few years. This helps banks prioritize improvements and investments. There will always be some losses, so if this lagging indicator is within acceptable limits the bank may decide to not take any action. If the losses are too high the bank will work on eliminating the problems.

Leading KRIs

Leading KRIs can help prevent problems and eliminate risks before they are actualized because they extrapolate future issues from current trends. A leading indicator keeps track of events that can result in a disaster or loss in the future. Keeping track of leading KRIs can help organizations determine problems in their current processes, safety measures, organizational culture, and much more.

We used the example of workplace accidents as a lagging indicator. There are many known factors which affect the probability of a workplace accidents. Instead of simply keeping track of these accidents, the construction company can instead keep a track of these factors to preemptively minimize workplace accidents. They can keep track of what percentage of employees wear hard hats, how many employees have proper safety training, when the last safety inspection was carried out, and so on. These indicators are predictive in nature; instead of keeping track of accidents, we keep track of things that increase the probability of accidents.

Banks can identify KRIs that illuminate problematic trends within bank operations to mitigate risks and eliminate future losses. Banks can look at how long it takes the bank to detect compliance and risk issues, the number of customer complaints for departments, number of customer payments delayed, and other such metrics to uncover problems the bank may face in the future.

Risk technology and banking KRIs

Risk KRIs have always been important but the extent to which they were employed in risk management has historically been limited because risk managers had neither the tools nor the data that they would need to create and track meaningful KRIs. Each KRI requires real-time data because a KRI that is based on old data is not useful. Creating useful KRIs thus meant that risk managers would need to get the latest data from a wide variety of sources within the organization. This data was often not even being tracked.

Risk and compliance solutions eliminate this obstacle because risk and compliance solutions automatically track important metrics. Since all the risk and compliance processes are being handled within the same system, all the data required for banking KRIs is already present in one system. Some risk management solutions, like Predict360 and Insight360, can be set up to automatically keep track of important leading and lagging KRIs.

This results in a paradigm shift in the risk management infrastructure of the organization. The risk managers and the board members of the bank now have access to not just real-time risk data, but also real-time key risk indicators. They can quickly take actions to mitigate upcoming risks and solve deep rooted inefficiencies.

Want to see how your organization can easily keep track of banking KRIs through KRI software? Get in touch with our risk experts to see a demo of our solution.