A risk indicator is a piece of information that is a proxy for risk. The idea is that risk indicators should provide a good indication of the level of underlying risk, while being readily available or easily calculated. However, with modern technology there are many sophisticated indicators that count as being easily calculated.
Risk indicators can be used for any type of risk, and at any level of the organisation. They needn’t be totally accurate measures of risk (and indeed are unlikely to be, if they are readily available). Examples of risk indicators include:
- Exposure to a single counterparty, used for several types of credit risk
- Value at Risk, used for many types of risk in the banking industry and elsewhere
- Stock betas, for market risk
- Numbers of transactions, volumes of trades, values of transactions etc, for operational risk
Risk indicators are used for both monitoring and control. In monitoring, values are tracked over time, and significant changes are taken as indicating a change in the underlying risk level. For control, limits are placed on the values of indicators; activities are constrained in order not to breach the limits.
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