Principles for an Effective Risk Appetite FrameworkThe Financial Stability Board (FSB) is today launching a public consultation on its draft Principles for an Effective Risk Appetite Framework. The Principles will enhance supervisory oversight of firms, in particular of systemically important financial institutions (SIFIs), by establishing minimum expectations for the key elements contained in an effective risk appetite framework, such as: an actionable risk appetite statement; quantitative risk limits; and clearly defined roles and responsibilities of the board of directors, senior management and business lines.
The Principles also aim to establish a common nomenclature for terms used in the risk appetite framework, which will help to facilitate a common understanding between supervisors and firms and to narrow any gaps between supervisory expectations and firms’ practices.
An effective risk appetite framework is the foundation of good risk management. A firm’s risk appetite represents the aggregate level and types of risk a firm is willing to assume within its risk capacity to achieve its strategic objectives and business plan, and this should be set out in written form in a risk appetite statement.. The firm’s risk appetite statement, in particular, should be linked to the firm’s short- and long-term strategic, capital and financial plans, as well as compensation programmes. It should assess the firm’s material risks under both normal and stressed market and macroeconomic conditions, and set clear boundaries and expectations by establishing quantitative limits and qualitative statements for risks that are difficult to measure.
Julie Dickson, Superintendent of the Office of the Superintendent of Financial Institutions (OSFI) and Chair of the FSB Supervisory Intensity and Effectiveness Group, noted that “Changes to the financial and regulatory environment underscore the importance for firms to be able to make well-informed and forward-looking strategic decisions that can affect their ability to manage risk prudently and to remain profitable over time. Defining, measuring, monitoring, and articulating a clearly defined risk appetite for the firm is critical to guiding those strategic decisions.”
To help inform the final version of these Principles for an Effective Risk Appetite Framework, the FSB welcomes comments on the consultative document. Responses should be sent to [email protected] by Monday 30 September 2013. Responses will be published on the FSB’s website unless respondents explicitly request otherwise.
The final set of principles will be released by end 2013.