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Developing a strong risk appetite program - challenges and solutions

Company: KPMG

KPMG case study

Category: Basel III

Published: 13 January 2014

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Overview

Creating a robust risk management program, and integrating it with broader corporate strategy, is a critical challenge for banks. An explicit and effective risk appetite statement is an increasingly important element of this process. The ICAAP process - the internal capital adequacy assessment mandated by the Basel Accords - has been familiar for some years, and an explicit determination of risk appetite is one of the key foundations for this. However, with the aim of improving risk management in the wake of the crisis, regulators in most jurisdictions are placing much greater emphasis on this issue, and supervisory bodies are scrutinizing banks' responses much more closely. Common reference publications include: Financial Stability Board's (FSB) "consultative document" on Principles for an Effective Risk Appetite Framework, Basel Pillar 2 ICAAP and Pillar 3 Disclosures, Senior Supervisors Group's 2010 report on developments in risk appetite frameworks and IT infrastructure, The Institute of International Finance's (IIF) recommendations and best practices for determining a bank's risk appetite, etc.

This paper describes several challenges associated with risk appetite program development, technical constraints associated with implementation and some commonly deployed solutions.

 

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Categories related to Basel III