Article

Risk Appetite & Assurance

Do you know your limits?

European Supervisory bodies and the global regulatory community are building an emerging consensus on what constitutes an effective risk appetite framework.

The Financial Stability Board has released a consultation paper on the subject: Principles for an Effective Risk Appetite Framework and understanding whether the organisation has a fit for purpose framework that accords with these principles is firmly on Board agendas.

The need for an effective risk appetite framework was reinforced through observations of failures in its absence during the financial crisis. Regulatory guidance across Europe has focussed on delivering “greater clarity and an elevated level of consistency among national authorities”.1 It is therefore helpful to establish a common language within and between organisations and regulators when discussing this subject. 

Components

An effective risk appetite framework combines a series of appetite statements, limits, measures and standards that together enable the Board and the business to set, monitor and manage:

  • Risk appetite.
  • Risk capacity.
  • Risk proile.
  • Risk appetite limit.
  • Risk appetite triggers.
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