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Risk appetite frameworks

How to spot the genuine article

Risk appetite frameworks

 

Background

Everyone these days seems to agree that risk appetite frameworks are good things – even if no-one can quite agree what a good one looks like.

The regulatory landscape for banks– be it speeches, working papers and draft or final regulation – is 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 remains a surprising variety of opinion about what it actually means for banks to establish and embed a proper risk appetite framework.

Our paper, ‘Risk appetite frameworks: How to spot the genuine article’, seeks to clarify this issue through:

  1. Summarising the arguments in favour of risk appetite frameworks;
  2. Highlighting the emerging consensus on the core concepts of risk appetite between regulators and firms within the financial services industry;
  3. Illustrating what we think ‘good’ looks like for a risk appetite framework;
  4. Suggesting ways to spot a ‘genuine’ risk appetite framework; and
  5. Suggesting what risk appetite might look like in three to five years’ time.

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Risk appetite frameworks - How to spot the genuine article (PDF)

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