Post on 11-Nov-2014
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15 TIPS FOR DEVELOPING A RISK APPETITE FRAMEWORK
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TIP 1: THE RISK APPETITE FRAMEWORK AND STATEMENT MUST BE LINKED
The risk appetite framework provides a structured approach to the management, measurement,
and control of risk. It’s a way that people and processes ensure that
business activities provide an appropriate balance of return for the risk assumed and remain within the
stated risk appetite of the institution.
The risk appetite statement is an expression of the amount and type of risk that the institution is willing to
accept in the pursuit of its business.
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TIP 2: YOUR RISK APPETITE STATEMENT SHOULD INCLUDE A PREAMBLE AND METRICS
• Includes: • High-level guiding principles of the institution. • Why the statement was developed. • How it was developed. • How it is to be used in the planning process.
Preamble
• Both qualitative and quantitative metrics. • Articulates the institution’s risk appetite. Metrics
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TIP 3: RISK APPETITE EXTENDS TO COMMON FUNCTIONS
Setting strategy, goals, and
objectives for the company.
Credit origination and decision
making. Limits and portfolio
management.
New-product introduction.
Compliance with rules and
regulations. Capital allocation.
Compensation and incentives.
Treatment of customers; product
and service suitability.
Community involvement.
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TIP 4: THE BOARD MUST ARTICULATE OBJECTIVES
The board of directors should articulate the institution’s strategic objectives and share them with the key stakeholders.
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TIP 5: THE CEO ARTICULATES OBJECTIVES AND LIAISES WITH STAKEHOLDERS
The chief executive officer serves as the central point of contact between stakeholders and articulates the importance, benefits, and use of the statement of risk appetite.
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TIP 6: THE CRO COORDINATES THE PROCESS
The chief risk officer and/or other senior executive (or delegates responsible for coordinating the risk appetite process) should hold a series of focus groups with senior management to ascertain and document the level of risk they are willing to assume in pursuit of value.
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TIP 7: THE LINES OF BUSINESS IDENTIFY INITIATIVES AND REQUIREMENTS
Each line of business should identify its proposed key initiatives and capital requirements in light of its economic, risk, and competitive outlook.
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Articulate the risk appetite framework.
Identify and reconcile the key business initiatives with the top-down corporate strategic objectives
and the amount and type of risks taken.
The risk team should prepare the capital capacity of the institution.
TIP 8: THE RISK APPETITE FRAMEWORK SHOULD BE SPECIFIC
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TIP 9: THE RISK APPETITE FRAMEWORK SHOULD BE WELL THOUGHT OUT
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Discuss the document with the executive management
team.
Then revise it. Then get the
executive management
team’s approval.
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TIP 10: THE RISK APPETITE FRAMEWORK SHOULD BE APPROVED AT THE BOARD LEVEL
Present the document to the full board of directors for discussion and approval.
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TIP 11: COMMUNICATE THE RISK APPETITE FRAMEWORK
Once approved, communicate the risk appetite statement: • Institution-wide. • Ahead of the budget and
planning process. • And linked to policies and
tolerances.
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TIP 12: PLAN WITHIN THE RISK APPETITE FRAMEWORK
Ask business lines to build their plans within the context of the risk appetite statement.
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TIP 13: ALIGN WITH YOUR RISK APPETITE FRAMEWORK
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Business lines should review their existing risk polices and limits to ensure they are aligned with the risk appetite statement.
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TIP 14: MONITOR AND REPORT
Regularly monitor and report risk appetite and discuss it as required with the board and external stakeholders, including external auditors, regulators, and, investors (if the company chooses to make public its risk appetite statement).
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TIP 14: MONITOR AND REPORT (CONT.)
• Conduct risk reporting in line with the approved and established policies and tolerances.
• Management reports should routinely include risk appetite measures.
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TIP 15: PROMOTE A RISK CULTURE
Your risk appetite statement and framework are as much about culture and a way of thinking and behaving as they are about risk policies, tolerances, parameters, models, reporting, and governance.
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FOR IN-DEPTH INFORMATION ABOUT ESTABLISHING A RISK APPETITE FRAMEWORK,
SEE RMA’S RISK APPETITE WORKBOOKS
• Risk Appetite Workbook • Risk Appetite Workbook (Download; available to RMA
members only) • Risk Appetite and Scenario Analysis and Stress Testing
Combo • Risk Appetite, Scenario Analysis and Stress Testing, and
Governance and Policies Workbook Combo • Governance and Policies Workbook and Risk Appetite
Combo
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