Senior Risk Practitioners Explore Risk Appetite Frameworks in Global Risk Institute’s First Education Forum in Montreal
4 February 2015
FEBRUARY 4, 2015
Risk appetite frameworks are increasingly being recognized as cornerstones in building a strong risk culture for financial institutions and boards alike. On 20 January 2015, the Global Risk Institute (GRI) in partnership with Finance Montreal brought together prominent risk management practitioners in an education forum to explore the opportunities and issues involved in establishing risk appetite frameworks. This was the first GRI education forum held outside Toronto with more planned for later in 2015.
Over the last two years, global standard setters and risk management practitioners have emphasized the need for financial institutions to have a board-approved risk appetite statement. This statement is a formal document outlining the type and amount of risk an organization is willing to take on. A risk appetite framework is the overall management approach through which an organization’s risk appetite is defined, applied and controlled. The framework provides important context and guidance to help inform an organization’s business strategies, practices and policies.
Michael Stramaglia, the forum facilitator and GRI’s Executive in Residence, described the three stages of establishing an effective risk appetite framework: define, apply and control. Through presentations and case study exercises, the forum’s participants unraveled the challenges of each stage of the framework to balance risk-taking opportunities with the interests of the organization’s values, strategy and stakeholders.
Throughout the forum, participants’ discussions revealed the complexity of reconciling risk appetite in practical business scenarios. The case studies required participants to assess and apply risk appetite frameworks in evaluating an investment opportunity, amending a hedging policy, and aligning compensation incentive systems.
In concluding a case study example, Michael Stramaglia said, “In business you’re always going to be met with tough situations that require grey-area judgement calls. A well-crafted risk appetite framework can be invaluable in helping organizations navigate through these choices in a disciplined fashion, with due regard to the applicable risk/return trade-offs. However, as business strategies evolve, risk appetites must also be regularly reviewed and, when appropriate, updated in order to effectively guide those strategic decisions. Likewise, the framework must be reviewed to ensure it still provides a clear line of sight on any new and emerging risks facing the organization.”
The discussions surrounding risk appetite frameworks were intrinsically linked to building risk culture. To build a robust risk culture, it’s important for an organization and its people to be clear on risk — what risks exist, how much risk capacity they have and how much risk they’re willing to take on. Participants discussed how risk appetite frameworks can play a part in building risk culture by helping to establish an active dialog and shared perspective between the board, management and other key stakeholders.