A report released on 17
June from influential industry lobby group the Institute of
International Finance (IIF) has concluded that banks’ risk controls
need to be boosted via fresh IT investment combined with sharper
supervision by senior bank management.
Klaus-Peter Müller,
co-chairman of the IIF’s committee on implementation (and chairman
of the supervisory board of Germany-based Commerzbank,
said:
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“It is essential that firms have in place
a risk appetite framework that enables boards and management to
take an informed view about the amount of all types of risk that
can be taken throughout the firm, including all the business
divisions, and link this directly to strategy and business plans,”
said Mueller.
The joint IIF-McKinsey report on risk IT
was based on a survey of 44 firms.
Philipp Härle, director
at McKinsey & Company, said:
“On the basis of
the firms that we surveyed it is evident that most firms plan to
make substantial investments – an average of $390m each – in this
area over the next five years, representing an increase in their
spending of around 50%.
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By GlobalDataMüller set out four key
elements central to the creation of a sound risk appetite
framework:
- A strong risk culture is a prerequisite
to putting in place a fully effective risk appetite. Firms with
demonstrably robust risk cultures and supporting “tone from the
top” are best equipped to build engagement and put in place
effective structures; - It is essential that the determination of
risk appetite is inextricably linked to strategy development and
business plans, otherwise the two will rapidly come into conflict,
and the conduct of business activities may lead to risk outcomes
which are outside acceptable boundaries. Importantly, our study has
shown that leading banks have made this linkage in an effective
way; - Risk appetite frameworks call for the use
of extensive judgment on the part of boards and management, in
terms of where to begin, where to focus, and how to engage business
leaders. Diverse risk cultures and business models, as well as
differing degrees of complexity mean that this is very definitely
an area in which “one size does not fit all”, and - Stress and scenario testing are important
components of managing and evaluating risk appetite. Specifically,
consciously constraining aggregate risks in advance in such a way
as to ensure the firm’s survival under severe macroeconomic, market
and liquidity stress scenarios is at the heart of setting risk
appetite appropriately.
