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Risk Appetite Framework

At Center for Risk Management Strategy (CRMS), we examine your business environment, using our ‘Stress Event Database’, which stores the information of ever changing internal and external environments such as macroeconomic, financial, and geopolitical situation, and thereby identify the situation where the firm could ‘betray’ stakeholders’ expectations (or the materialization of risks to be avoided). Also, we assist the management to set risk appetite for these risks.

More and more global firms have introduced Risk Appetite Framework (RAF)

Relapse of Greek Crisis, plunge in crude oil prices, prolonged territorial disputes in Ukraine, sharp slowdown of China’s economy and anticipated interest rate hike in the US, etc. … these uncertainties facing global firms have continued to increase. Meanwhile, increasingly globalized and diversified stakeholders request the management of global firms to be more transparent and accountable. Under such circumstances, the increasing number of global firms have now tried to build “Risk Appetite Framework” (RAF) as a new management system to address emerging risks the forward-looking way.

 

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Example of Risk Appetite Structure(Financial Risk)

RAF is dubbed as “Risk Management Revolution” after the Global Financial Crisis

Risk Appetite refers to ‘the risks to be taken willingly’ by the management, in order to satisfy various expectations of stakeholders. In RAF, the management: (1)specifies various risks associated with the business strategy: (2)determines whether the level of risk measured is appropriate for risk appetite, or stakeholders' expectations: (3)articulates KPI corresponds to management’s risk appetite and thereby allows management’s decision to reach the furthest end of business operation. Thus, RAF serves as cranial nerve function of firm’s decision making process, which is transparent to outside stakeholders. Its potential effect could be promising, partly evidenced by the move of financial regulators, which experienced hardship in the financial crisis and now request every global banks to be equipped with RAF. 

Effect of risk appetite framework introduced

Importance of defining clearly the scope of risk and setting risk appetite for them

To formulate an effective RAF, all the important risk on the premise of stakeholders’ expectations must be included. Some risks might be hard to be measured but could often be visualized by using stress scenarios. Risk appetites are supposed to be set as a range, with which all these major risks remain in .

Various Risks & Relationship with Stakeholders’ Expectations

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・Identify various hidden risks & setting risk appetite for them
・Formulate stress scenarios to articulate the risks to be compared with risk appetite
・Decide the reactions to the crises and set KPI
 

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The article download on risk appetite framework construction support

 

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