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Risk appetite frameworks ‘must be effective’

Banks urged to ensure their risk appetite frameworks are not simply re-branded versions of existing risk management structures.

Thursday 11 July 2013

Risk appetite frameworks ‘must be effective’Effective risk appetite frameworks can shield financial institutions from the dangers posed by economic crises, according to experts from Deloitte.

Tim Thompson, risk and regulation partner at the organisation, believes these frameworks can improve understanding among high-level staff members about the risks their companies are taking, while encouraging a bank’s entire workforce to conform to a “high-quality risk culture”.

Addressing business risks
Deloitte has launched a new report in a bid to increase understanding of business risks among chief executives and company board members.

The study, entitled Risk Appetite Frameworks: How to Spot the Genuine Article, seeks to improve people’s knowledge regarding the risks which could hamper their future business strategies.

Mr Thompson feels that risk appetite frameworks can support businesses in a range of areas, lowering the chances of “catastrophic failures” taking place, while supporting “conscious and profitable risk-taking” practices.

He said:
“It is certainly no coincidence that the businesses with effective risk appetite frameworks in place were protected from the worst of the credit crisis because they were able to react quickly to deteriorating conditions.”

Rebranding warning
However, the expert emphasised that financial institutions need to ensure that their risk appetite frameworks are effective and do not simply rebrand “existing risk management limits”.

Mr Thompson warned that businesses would only gain “a fraction of the benefits” by taking this course of action, and they would fail to comply with supervisory expectations.

He concluded: “This approach is a long way from our understanding of a genuine risk appetite framework.”

Clarity for banks
In a bid to offer clarity to banks regarding their approaches to risk appetite frameworks, Deloitte’s new report seeks to outline the arguments in favour of these structures, while discussing the components which make up ‘good’ and ‘genuine’ schemes.

The study summarises the ways in which these frameworks can benefit businesses, before forecasting how the risk appetite landscape might change in the coming half-decade.

Copyright Press Association 2013

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