The pith and marrow of risk appetite

Embarking the risk oversight journey

Many financial institutions are paying a lot of attention these days to the design and implementation of an adequate system of internal risk governance, which includes responses to challenges such as, defining risk appetite and translating it into operational limits.

Executive summary

This article focuses on this particular item by clarifying key concepts and addressing the main practical challenges for companies that have embarked on the definition of their risk appetite.

There are both ‘push’ and ‘pull’ arguments for firms to improve their risk appetite frameworks. The ‘push’ arguments come from the slew of recent or forthcoming regulation and supervisory guidance that will compel firms to improve the way that their risk appetite frameworks operate—or in some case build this capability from scratch. The regulatory landscape for banking and insurance firms—be it speeches, working papers and draft or final regulation—is indeed full of references to risk appetite, its benefits, uses, applications and case studies of failed firms whose weak risk appetite frameworks played a part in their downfall. When firms are criticised for shortcomings in their risk governance and management, an appetite framework is commonly prescribed as a cure by regulators. And yet, there remain a surprising variety of opinions about what it actually means to establish and embed a proper risk appetite framework.

Just as importantly, however, the ‘pull’ arguments come from the firm-wide benefits that accrue once risk appetite is properly embedded within an organisation: conscious risk taking, joined-up risk management or specific focus on the drivers of quality risk management can all be valid drivers for establishing a sound risk appetite framework. 

Inside magazine issue 3 – February 2014

Inside is Deloitte’s quarterly magazine offering an exclusive insight into best practices, trends and opportunities faced by our clients across all industries.

Inside focuses on the main hot topics relevant for the market (Asset management, Banking, Insurance, Public sector, Healthcare, Private equity, Real estate, TMT, Manufacturing and consumer business, Transport and logistics). 

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