The Senior Supervisors Group (SSG) has recently published a report that assesses the progress financial institutions have made in developing and building infrastructures to measure their risk appetite. This report is a follow up to their 2008 report which identified key weaknesses in many risk management practices.
The risk team at any financial institution is extremely important; they work every day to ensure that their firm is not biting off moreRisk Appetite than they can chew. As we know, within the past few years many firms had gotten into the habit of taking on more risk than they could realistically afford (you remember 2008!). Since then, companies have been working hard to find new tactics and ways to implement risk appetite frameworks, which will help them see where most of their risk lies, and how much is too much.
The report by the SSG found that firms who have strong and active engagement from their board of directors and senior management have more affective risk appetite frameworks, versus firms who rely solely on their risk team. I found this to be a very interesting and telling detail. When I think of a large financial institution such as Goldman or Barclays, I think of all of the individual branches (such as the asset management branch or the product branch and so on). Rarely do I consider that all of these individual parts affect each other’s business for the good or the bad. While the CRO does lead risk discussions at their firm, there must be a level of cooperation between the CRO, CFO, CEO and the board members in order to agree and understand just how much too much risk is. If different departments cannot work together to understand their risk infrastructure then ultimately we could see 2008 happen all over again.
At our upcoming 5th Annual OpRisk Conference, we have a session dedicated to this issue where we will be discussing this further, and you can hear how firms are assessing their risk appetite, and the best ways to go about it.