Defining and Cascading Operational Risk Appetites

Michael Grimwade

“The harder I practise, the luckier I get.”

Attributed to a variety of golfers, including Gary Player, Arnold Palmer and Lee Trevino

Defining appetite for risk is fundamental to managing it effectively. The Financial Stability Board defines risk appetite as a written articulation of the aggregate level and types of risk that a firm is willing to accept, or to avoid, in order to achieve its business objectives. This articulation should include both qualitative statements and quantitative measures, and should cover the more difficult-to-quantify risks, such as reputational and conduct, as well as, money laundering and unethical practices.11“Principles for an Effective Risk Appetite Framework”, Financial Stability Board, November 18, 2013. Risk-appetite statements should be approved by the board, and then cascaded down the organisation, through a portfolio of policies, processes, controls, and systems through which risk appetite is established, communicated and monitored. For market risk this is relatively straightforward. For example, the quantitative measures may involve setting firm-level limits for value-at-risk (VaR) and stressed value-at-risk (SVaR). These limits can then be

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