Appetite for Instruction

Banks that craft a well-articulated position on risk appetite are in a better position to manage risk consistently and effectively. They do so through their risk appetite statement, which can be thought of as a covenant of sorts among leadership, a guide for front-line staff, and the guardrails around risk-taking behavior. According to this RMA Journal article, it is among the most important documents for banks to get right. 

Informed by an RMA working group that included six of the eight U.S. G-SIBs and nearly all U.S. banks with assets of more than $250 billion as of 2023, “Learnings From Risk Appetite’s Evolution and Ideas for the Path Forward” notes that:  

• Quantitative metrics that define the boundaries of measurable risk-taking are at the core of a risk appetite statement. These risk metrics are largely focused on operational and credit risk. 
• Banks are converging on an approach to governing risk appetite. Most banks surveyed said they seek board or board risk committee approval of their enterprise-level risk appetite statement annually. 
• Banks are evolving their risk appetite statements to reflect the emergence of complex risks, focus more on non-financial risks such as AI, and strengthen the connections between risk policy and business processes. 

The piece stresses that the work around risk appetite is never truly “done.” The group’s work emphasized the importance of creating a “living, breathing” statement to reflect the constantly evolving nature of risk. In other words: Improving risk frameworks, understanding the linkages among risk types, and establishing explicit connections between risk appetite practices and business processes better prepare banks for whatever changes lie ahead. 

Read the article, which explains risk appetite practices and actions banks can consider to advance their risk appetite framework going forward, here.