Risk Governance and Risk Appetite

Leslie Rahl and Peter Niculescu

Risk governance is an extremely important topic. As we go to press, there is considerable attention being paid to the risk governance issue that may or may not exist in the JPM/CIO loss. While it would be unfair to say that risk governance did not exist in some fashion when the first edition of this book was published in 2000, the landscape has changed dramatically. Regulators and rating agencies have embraced the importance of risk governance and it has become a hot topic in the board room. While effective risk governance is essential, the ultimate risk-management goal of an effective financial institution is a risk-conscious culture. It is important that every employee, no matter what their job function, understand that they are part of the front line protecting the institution from unintended risk.

Whether a financial firm chooses to formally budget risk or not, effective risk governance is essential. Here are some of the key components of effective risk governance:

• a clear, well articulated risk-appetite and risk-attitude statement;

• an independent, strong and respected chief risk officer who has unfettered access to the board risk committee;

• an effective