SAARC FINANCE,
REGIONAL SEMINAR, ISLAMABAD
11
Embedding &
Establishing the Risk Appetite
Background and Objectives
•The recent global crisis has demonstrated clearly that
many financial institutions did not understand the
level of risk embedded in their various portfolios; hence the losses have been
colossal requiring huge financial support from the
Governments.
•Basel Committee and the Country Regulators are therefore
strongly of the view that each Bank articulate
a Risk Appetite Statement (RAS). This
statement should articulate the level and nature of Risks
that the Entity is willing to take in order to achieve its strategic goals and
objectives.
•It is the responsibility of the Board of Directors and
Senior Management to articulate the RAS in a manner
that all Stakeholders can understand the boundaries within which the Entity
will operate. In other words, it
defines the losses that the Entity is willing to tolerate in very adverse
economic situations.
•The RAS sets the boundaries within which the Board of
Directors should drive strategy, and also the tolerance
limits that Senior Management must set to achieve financial goals.
•The RAS has a medium to long term perspective. It does not change year to year to suit the
annual business plans of different businesses.
•RAS will typically set boundaries for areas such as
expected returns, maximum volatility of earnings, minimum
capital and solvency, minimum liquidity, shareholder value protection even in
the event of stress, maximum fraud & operational losses and
reputation.