Key risk indicators (KRIs) play a crucial role in treasury risk management by providing timely alerts on a company's changing risk exposures. For treasury risk events—such as counterparty defaults, losses due to changes in foreign exchange (FX) or interest rates, missed loan payments, investment losses, or funding shortages—KRIs help to detect changes in:

• the likelihood (probability) that the event will occur;
• the impact to the company if the risk event does happen; and
• the benefit of mitigating controls, such as a derivative hedge.

KRIs quantify exposures using metrics that can be either direct measures of risk (e.g., value-at-risk, volatility) or proxies for risk, such as leverage ratios, interest coverage ratios, sales growth, inflation rates, and the results of customer surveys.

Sophisticated treasury and risk management functions produce KRIs for their company's main risks and use the resulting metrics to make informed risk decisions. A company that learns a key risk is growing might choose to limit potential losses by reducing exposure to that risk, or it may maintain the increased risk level temporarily to take advantage of an opportunity. A KRI that shows the related risk is shrinking may indicate that a company is not taking enough risk and is missing out on potential profits. KRIs and their associated limits help ensure that a company's risk profile remains aligned with corporate strategy and risk appetite as the business evolves.

A treasury team utilizing KRIs should develop a different set of indicators for different levels of the company: The board and senior management will typically focus on a select few KRIs, while operational managers will want to see a larger set of metrics. At every level, well-designed KRIs can act as forward-looking, or leading, indicators, predicting risk events before they occur so that decision-makers can take timely preventative actions or else proactively—and knowingly—accept higher levels of risk.