Featured Product

    Danièle Nouy of ECB on Improving Risk Appetite Frameworks of Banks

    April 10, 2018

    Danièle Nouy of ECB spoke at the International Conference on Banks’ Risk Appetite Frameworks in Ljubljana. She defined the risk appetite framework and explained how to judge the quality of risk appetite frameworks. Then, she discussed the current state-of-play regarding the risk appetite frameworks of banks and discusses the improvements banks need to make in their frameworks.

    Ms. Nouy explains that the risk appetite frameworks should be comprehensive, effectively governed, consistently used, and fully integrated into strategic decision making. After explaining the expectations from banks, she moved on to highlight the progress made by banks. She added that the risk appetite frameworks of banks are now better structured and subject to clearer governance. For instance, most banks have clarified the role of the relevant stakeholders involved in the risk appetite framework. Moreover, in many banks, internal auditors have reviewed the effectiveness of risk appetite frameworks. Many of these frameworks cover a broader set of risks than before. Most banks go beyond the regulatory minimum to define metrics that are more suited to their business models. Ms. Nouy believes that, despite this progress, banks need to improve their frameworks and then points out four things that banks need to work on:

    • Non-financial risks should be better covered (and not be completely left out). If a bank cannot put concrete numbers to these risks, it should at least use qualitative statements.
    • The governance of risk appetite frameworks must be further improved. Boards need to play a bigger role in the definition and review of risk appetite frameworks.
    • Banks must use risk appetite limits as a tool to monitor their risk profiles, keep risks in check, and set the right incentives for the organization.
    • Banks need to embed risk appetite frameworks in their strategic processes.

    She emphasizes that banks need to take a holistic approach to risk culture and risk management, including risk appetite. “These things need to be perfectly attuned. And they need to be in harmony with the rest of the organization—with the business model and with remuneration schemes, among other things. This framework needs to be an integral part of the decision-making process.” She added that most banks do not use risk appetite limits and statements as tools to facilitate discussion at various levels of the organization. They need to change this approach and create better incentives for complying with risk appetite frameworks. “Here, the tone from the top plays a crucial role. It is those at the top who have to promote a sound risk culture—by putting it into practice, by acting as role models. The board and the senior management must define values and set expectations for the risk culture. The board in particular must challenge the senior management and so ensure that each and every strategic decision is based on a sound risk analysis. Moreover, having a sound infrastructure for risk data would make this easier to achieve.”

     

    Related Link: Speech

    Keywords: Europe, EU, Banking, Risk Appetite, Risk Management, Governance, ECB

    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7307