Risk Appetite and Framework

Ariane Chapelle

After dedicating their attention successively to incident data collection, governance, scenarios and risk assessments in relatively independent ways, regulators are now focusing on the overall consistency of risk management frameworks, which comprise the methods and tools a firm uses to manage its risks. This article elaborates on a 2007 publication by the erstwhile Financial Services Authority (FSA), which looked at ways to establish an aligned risk management framework.

The FSA’s brief report from an expert group on operational risk appetite summarises opinions and practices of 12 of the largest international financial institutions at the time. Published before the financial crisis, this document constitutes a valuable piece of research that many unfortunately seem to have forgotten. Its most interesting finding is that operational risk appetite is expressed in different forms at different management levels of an organisation (Figure 7.1). These forms of expression also correspond to some of the key elements of an operational risk management framework: capital, risk assessments, key risk indicators and loss data.

Figure 7.1


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