A fresh take on risk and valuation
Implementing a Risk Appetite Framework entails setting limits on all key risks, regular monitoring of the entity’s risk profile and taking remediation actions in case of breaches. To set the limits consistently across all risks and sub-risks, a top-down approach is typically used, broadly consisting of 2 steps: Defining Risk Appetite Statements and Translating these statements into risk limits across all risks. When risk limits are breached, the entity should define remediation plans. Finalyse has the capacity and expertise to work in co-creation mode to define and implement a Risk Appetite Framework, which will rely on risk limits understood and applied by the 1st and 2nd lines of defence consistently. Such framework will be effectively integrated in your value chain.
The Board’s and management’s risk appetite is translated into risk limits which can be used at all levels of the company
Limits are set consistently across all key risks
The high degree of automation for monitoring the entity’s overall risk exposure makes it close to real time
Tailor-made information and metrics ensure faster remediation of risk limit breaches
Truth be told, from a regulatory perspective, there is much more of the latter going on. Risk appetite is now widely recognised to be the main maker – or breaker – of success for financial institutions. As post mortem examinations of failed companies showed, a poor definition of risk appetite potentially leads to multiple errors in the course of business, such as taking unwarranted risks, resorting to short-term funding while taking long-term commitments, or to a general lack of alignment towards risk taking within the firm. These risk management mistakes could already prove to be fatal to the organization in isolation; if they happen simultaneously within an institution, demise is most certainly unavoidable.
ReadThis article details the mechanisms governing risk decisions and the underlying complexity of using risk appetite as a component of the strategic decision.
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