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