Ireland's risk appetite paper - a quick run-down
Chris Hamblin, Editor, Editor, London, 2 January 2015
The Central Bank of Ireland has published a 'feedback statement' on risk appetite at regulated firms.
The Central Bank of Ireland has published a 'feedback statement' on risk appetite at regulated firms.
The Central Bank published the relevant discussion paper on 20 June last year with a view to generating discussion and debate on the subject, its linkage with organisational strategy and its importance for financial institutions. The DP considered the main concepts of, and theories of, risk appetite and its place within risk appetite 'frameworks' and provided some suggestions about the likely contents of a risk appetite statement. Some 18 responses came in, full of useful anecdotes. The regulator is at pains not to be saying yes or no to the views of the respondents at this stage.
Seven respondents thought that the mandatory introduction of risk appetite 'frameworks' was vital, whereas others were cooler, although all like the idea. Many have them already, some due to their own interpretation of existing regulations and some as good business practice.
The DP warned: "Sound practice is for organisations to set a series of buffers around risk appetite such that a breach of risk appetite does not necessitate the failure of an institution." It even published a little diagram showing risk appetite as an inner circle and risk capacity as an outer one, pointing out that the 'buffer' was the space in between the two. This was to end the frequent practice of firms using these terms (plus the term 'risk limits') to mean the same thing.
One of the questions it asked was: "In your opinion would it be desirable for the Central Bank to facilitate a forum, comprising participants with experience in the financial services industry to
develop a range of good practices with respect to the preparation and monitoring of Risk Appetite Statements?" The respondents generally poo-pooed this idea, thinking that the 'forum' would be overly prescriptive, led as it would be by the Central Bank, and would represent creeping regulation by the back door.
