Enabling more effective risk appetite frameworks

September 2013

Since the launch of the Bank Governance Leadership Network (BGLN) in 2009, participants have been discussing approaches to improve risk governance. There is now general acknowledgement that in the lead-up to the global financial crisis, significant risks in the system were missed, understated, or simply ignored by banks, regulators, supervisors, investors, and others. Since then, changes have been made across an array of areas, including governance arrangements, risk processes, risk reporting, and new personnel, including new directors with risk experience.

A major area of focus within the BGLN on improving risk governance has been the adoptionfor many, for the first timeof formalized risk appetite statements (RASs) and the implementation of risk appetite frameworks (RAFs), as a representation of each bank’s risk preferences in the context of, or to drive, their approved strategy. Focus intensified in the middle of last year as global regulators and supervisors, under the auspices of the Financial Stability Board (FSB), engaged in a review of risk practices across large global banks, and at the same time began developing a set of agreed principles to inform banks and supervisors on this critical issue.

Initial BGLN discussions revealed an enduring lack of clarity regarding the objectives and core elements of an RAF, complicated by significant differences in the terminology and approaches banks have used. As one chief risk officer (CRO) put it, “I still don’t think there is agreement across the industry on what a RAS [or] RAF is.”  BGLN discussions then focused on determining how banks have been implementing their own versions of RASs and RAFs, where they are still experiencing implementation challenges, and how they and their supervisors might evaluate effectiveness. All along, the BGLN’s aim has been to bridge the gaps in understanding and expectations as to what is possible and what constitutes success.