Insights

Risk Appetite

Time for impact

Risk appetite is not a new concept in financial services. At the same time, there is wide disparity in the degree to which banks have fully operationalised and embedded risk appetite within their organisations.

In a recent survey of 65 institutions conducted jointly by Oliver Wyman and Risk Management Association (RMA), we found a relatively uniform spread of institutions that reported being on their “first,” “second,” and “third” generation of risk appetite statements. A large proportion of Asian banks are currently on their first or second generation of risk appetite statements (RAS), with a wide dichotomy across the markets.

While the institutions’ risk appetite frameworks may be at varying degrees of maturity, there is a clear convergence towards a common understanding of the critical role risk appetite should play in the way banks manage earnings’ volatility, capital, and liquidity. Risk appetite is essentially the “language” used to communicate the boundaries within which banks should operate as they pursue their strategic goals, and should serve as the medium through which the board and senior management shape the risk profile of the institution.

This paper examines some of the key motivations why banking institutions are now placing a much greater emphasis on embedding their risk appetite framework within the organisation, and outlining the key elements to ensure that the framework has a meaningful impact on key decision-making processes.

Authors:

Christian Pedersen – Partner and Head of Finance and Risk Practice, Asia Pacific
Cheng Yen Chu – Partner, Finance and Risk Practice
Jayant Raman – Manager, Finance and Risk Practice

Risk Appetite


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