Risk Appetite Framework Linking Risk to Strategy Joseph A. Iraci Managing Director, TD Ameritrade

Transcription

1 Risk Appetite Framework Linking Risk to Strategy Joseph A. Iraci Managing Director, TD Ameritrade

2 All Comments Presented Here and Discussed Represent the View of the Speaker and Are Not Necessarily the Policy or Practices of TD Ameritrade 4/14/2016 2

3 Risk Appetite - Overview Governance failures have created an atmosphere where senior managers are feeling pressure to ensure governance and oversight responsibilities are getting proper attention. Pressure is coming from both regulators and shareholders. Fundamental question to ask is How much risk are we willing to assume? Risk Management should play a critical role in supporting management s strategy and growth agenda. Risk Appetite establishes the guard rails that can link strategy and risk management. Risk Appetite means different things to different constituents: internal and external stakeholders, senior management and line management, Regulators and Board of Directors. If the Risk Appetite is not flexible it will not meet different expectations. A Risk Appetite Framework provides an overall blueprint to aid in the development and implementation of the firm s Risk Appetite in order to meet expectations. 4/14/2016 3

4 The Hidden Challenges of Risk Appetite How can a firm implement a Risk Appetite Framework that meets the requirements of all parties, provides meaning to all management levels, and supports corporate strategy? Adoption Risk Appetite may not resonate with all internal stakeholders Diffusion Risk is spread throughout the firm and embedded in the organization Measurement Risk consists of both quantitative and qualitative measurements Perspective Different business units will have different requirements 4

5 Risk Appetite Value Drivers Risk Sizing Clarify acceptable risk tolerances the firm is willing to assume Transparency Consistent communication to all stakeholders, both internal and external Governance Create links between strategy, execution, and risk management principles Value Flexibility Manage the balance of costs and risk to enhance competitive advantage 5

6 Risk Appetite - Governance 1. Board of Directors Accountable for Risk Appetite Framework Use the RAF to frame strategic decisions There must be alignment between the appetite statement and the RAF Need to understand financial and risk concepts 2. Senior Management CEO support is critical CRO must be empowered CRO and CFO alliance increases transparency Risk Appetite Business Lines Critical to linking the RAF with business strategy and budgeting Business strategies should align with the firm s risk profile 6

7 Promoting and Monitoring a Risk Appetite RAFs should ensure the entire firm is committed to a successful framework through incentives and consequences Scope and reach is largely determined by the firm Comparing the risk profile against the risk appetite should be ongoing The metrics should model the risk profile of the firm, and not rely on just a set of loss tolerance levels Multiple risk metrics help manage or mitigate downside risk in a deliberate way 4/14/2016 7

8 Implementing a Risk Appetite Framework Relationships Strong relationships within the firm are critical for implementation of a Risk Appetite Framework (RAF) Performance Acceptance and monitoring of an RAF is facilitated by risk measures and a common risk language 1 3 Accountability Strong accountability structures translate the RAF into clear incentives and constraints within business lines Strategy 2 4 The RAF drives strategic decisions by establishing a forward looking view of the firm s risk profile 8

9 Risk Appetite Framework Building Blocks Capital Allocation, Limits, Risk Indicators Top Down Approach starting with Strategy What risks the firm will and will not accept Top of house risk limits Business unit risk limits Corporate Strategy Risk Appetite Statement Risk Appetite Scorecard Business Unit Risk Appetites Work with the business to embed risk principles Support decision making Management Reporting Market Risk Credit Risk Liquidity Risk Ops Risk 4/14/2016 9

10 Risk Appetite Framework Critical Success Factors Core elements of a sound Risk Appetite Framework Incentives Action oriented incentives to engage the business Governance Clear Governance structure with Accountability Reporting Management performance reporting and risk assessment to create transparency Risk Tools Mechanism to transfer risk intelligence to business in order to make more informed decisions 10