Etica
A risk appetite statement is only part of the equation. A bank’s review process, penalties and trading limits often communicate much more.
The GARP Breakfast Briefing on Risk Appetite: Setting and Institutionalizing Enterprise Risk Tolerance, held in Toronto on June 15, 2010, discussed how financial firms decide how muchrisk they will take and articulate that throughout their organizations. Hosted by IBM Business Analytics, a new division of IBM Software that delivers clear, immediate and actionable insights into current performance and the ability to predict future outcomes, the discussion was moderated by Jaidev Iyer, President and CEO of consulting firm J-Risk Advisors. The panelists were: John Hull, MapleFinancial Group Professor of Derivatives & Risk Management, Rotman School of Management, University of Toronto; Frank McKeon, Banking and Financial Markets Executive for IBM Business Analytics; Joan Mohammed, SVP and Head, Corporate Risk Group, Bank of Montreal; and Anthony Peccia, Group Chief Risk Officer, Citibank Canada. Introducing the topic, Iyer advocated a thorough consideration of allaspects of risk appetite. “Every single phrase or word there really needs some exploration: risk appetite, defining it, institutionalizing it, communicating it, the idea of enterprise and enterprise risk.” However, many institutions failed to effectively achieve those goals in the last crisis, Iyer said. Several major banks were unable even to identify their levels of risk exposure requested by thefederal government following the bailout of the sector, he added. Defining risk appetite means reconciling actual risk exposure with institutional benchmarks, he said. The Risk Appetite Statement Bank of Montreal’s strategy for addressing this need for reconciliation was to create a risk appetite statement outlining specific processes that could be implemented on a micro-level by all of theinstitution's employees, according to Mohammed. Linking a high-level risk appetite statement with the limits imposed on a trader is the “silver bullet,” Mohammed said. “At the top of the house, you’ve got your board and your CEO and your top management team that formulates your risk appetite statement. You then have to translate that into the policies and the limits,” she said, with risk appetite beingdefined as the amounts and types of risk an organization is willing to take in order to generate attractive returns. Mohammed said that only about half of the employees at the Bank of Montreal would be familiar with its formal risk appetite statement. Instead, she said, many employees understand its risk appetite through more concrete expressions, such as trading limits, tolerance ranges, and otherspecific policies. Iyer agreed with the idea that an organization’s risk appetite is determined by the board of directors and transmitted to employees through policies, such as trading limits. “A limit
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“Risk statements, in my view, are about as useful as mission statements.”
—Anthony Peccia, Citibank Canada
comes from and should, I believe, be traceable back to an overall riskappetite,” Iyer said. However, he argued that in the last crisis many boards abdicated their responsibility to communicate this. McKeon argued that risk appetite could be understood by boards and transmitted to employees without generating a formal risk appetite statement. One of his previous employers “had a way of embedding what the real risk appetite was, from senior management all the way down to acommercial lender who was going to be making key decisions.” McKeon also said IBM was making a significant investment in risk management decision-making technology in response to demand from CIOs, who have said that risk management and compliance tools are one of their top priorities. Peccia amplified McKeon’s point that risk appetite statements may not themselves be necessary in order to...
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