When developing key risk indicators (KRIs), which guiding factor is most effective for risk practitioners?

In the development of key risk indicators (KRIs), policies and regulations serve as a crucial guiding factor for risk practitioners. This is because KRIs are designed to provide early warning signals regarding potential risk exposures and their alignment with organizational goals and compliance requirements.

Policies and regulations offer a framework for understanding the risk environment and establishing benchmarks against which performance can be measured. They help practitioners identify what risks need to be monitored based on compliance and governance requirements. By using these policies as a reference, risk practitioners can ensure that the KRIs they develop are not only relevant but also aligned with regulatory expectations, which is essential for maintaining compliance and avoiding legal penalties.

In contrast, while data extraction tools, nonperforming assets, and summary reports can support the KRI development process, they do not provide the foundational guidelines needed for determining what risks should be measured or prioritized. Effective KRIs ultimately reflect compliance obligations, strategic objectives, and operational standards outlined in the governing policies, making policies and regulations the most effective guiding factor for this process.