Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

1

JOIN. ENGAGE. LEAD.

15 TIPS FOR DEVELOPING A RISK APPETITE FRAMEWORK

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

2

JOIN. ENGAGE. LEAD.

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.

1

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

3

JOIN. ENGAGE. LEAD.

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

2

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

4

JOIN. ENGAGE. LEAD.

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.

3

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

5

JOIN. ENGAGE. LEAD.

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.

4

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

6

JOIN. ENGAGE. LEAD.

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.

5

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

7

JOIN. ENGAGE. LEAD.

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.

6

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

8

JOIN. ENGAGE. LEAD.

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.

7

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

9

JOIN. ENGAGE. LEAD.

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

8

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

10

JOIN. ENGAGE. LEAD.

TIP 9: THE RISK APPETITE FRAMEWORK SHOULD BE WELL THOUGHT OUT

9

Discuss the document with the executive management

team.

Then revise it. Then get the

executive management

team’s approval.

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

11

JOIN. ENGAGE. LEAD.

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.

10

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

12

JOIN. ENGAGE. LEAD.

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.

11

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

13

JOIN. ENGAGE. LEAD.

TIP 12: PLAN WITHIN THE RISK APPETITE FRAMEWORK

Ask business lines to build their plans within the context of the risk appetite statement.

12

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

14

JOIN. ENGAGE. LEAD.

TIP 13: ALIGN WITH YOUR RISK APPETITE FRAMEWORK

13

Business lines should review their existing risk polices and limits to ensure they are aligned with the risk appetite statement.

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

15

JOIN. ENGAGE. LEAD.

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).

14

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

16

JOIN. ENGAGE. LEAD.

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.

14

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

17

JOIN. ENGAGE. LEAD.

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.

15

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

18

JOIN. ENGAGE. LEAD.

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

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

19

JOIN. ENGAGE. LEAD.

SHARE THIS PRESENTATION

Visit http://www.rmahq.org for information on risk management

Visit our blog at http://rmablog.rmahq.org/

RMA is a member-driven professional association whose sole purpose is to advance sound risk principles in the financial services industry.

RMA helps its members use sound risk principles to improve institutional performance and financial stability, and enhance the risk competency of individuals through information, education, peer sharing, and networking.

Become a member today.