Post on 11-Feb-2022
Agenda1. Risk Appetite
2. How a bank fails - Capital & Liquidity Risk
3. Linking Risk Appetite to Strategy
4. Strategic Risk Measures
5. Capacity, Limits & Triggers
6. Stress Testing & Business Planning
7. Critical Success Factors & Challenges
Questions?
1.1 Risk Appetite Definition‘Risk appetite is the level and type of risk a firm is willing to assume in its exposures and business activities, given its business objectives and obligations to stakeholders.’
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Risk appetite is generally expressed through both quantitative and qualitative means and should consider extreme conditions, events and outcomes. In addition, risk appetite should reflect potential impact on earnings,
capital and funding / liquidity.
2.1 Capital Risk
Macro economics
Credit losses / Bad debts
Volumes
Margin erosion
Pension deficits
Rogue trading losses
2.2 Liquidity Risk
New bank: £10,000 capital
1. Accepts Deposit £100k –Instant Access
2. Lends £100k mortgage for 25 years
3. Depositor requests £100,000 withdrawal
Bank can’t pay – insolvent
But no loss and £10,000 capital is intact
Established bank: £10bn capital
1. Accepts Deposits £100bn -Instant Access
2. Lends £90bn mortgage for 25 years
3. Retains Liquidity buffer £10bn
4. Depositors request £15bn withdrawals
5. Bank borrows £5bn
Bank can pay – solvent
Still no loss and £10bn capital is intact
Strategic Risk Objectives
Strategic Business Objectives
Strategic Risks
Scale andefficiency
Groupstrength
Profit volatility and
return on capital
Customerloyalty
Regulatory compliance People/Values
Customerservice & products
Financial Strength
Customer Experience
Market Reputation
Regulatory Compliance
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Operations& People
Reputational Risk
A positive stakeholder perception
A fit for purpose,scalable operating model
Financial Risk
Acceptable Profit Volatility & Financial Strength
3. Risk Appetite: Linking Risk Appetite to Strategy
Profit Volatility
Financial Strength
Market Reputation
Customer Experience
Regulatory Compliance
3rd Party & Outsourcing
Process People Technology
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FINANCIAL RISK REPUTATIONAL RISK OPERATIONS & PEOPLE RISK
Profit Volatility
Financial Strength
Market Reputation
Customer Experience
Regulatory Compliance
Process People Technology3rd Party &
Outsourcing
4. Risk Appetite: The Strategic Risk Measures
- Profit 1 in 20- Capital ratios- Liquidity
- Debt rating- Customer Retention- Complaints- Regulatory engagement
- Change- Staff Attrition- IT availability- Change- Systems integrity- Outsourcing/Suppliers
5. Risk Appetite: Capacity, Limits & Triggers
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Exposure
Risk Profile significantly lower than appetite
Exposure
Exposure
Exposure
Risk Profile is within appetite
Risk Profile is outside appetite
limit
Risk Profile is outside Capacity
Risk Profile approaching
appetite
Limit
Trigger Exposure
Capacity
6. Stress Testing & Business Planning
Capital Stresses
Macro-economic 1 in 20• GDP• Interest rates• House prices• Inflation• Unemployment
Bank specific risks
Liquidity stresses
• Run on the bank• Funding market closure• Wholesale rollovers• Pipeline control failure
6.1 Business Plans and Recovery & Resolution
time
Stress buffer
Recoveryzone
Resolution
Point of Non Viability
Capacity
Limits
Triggers
Target operating range
impact
BusinessPlanrange
StressTesting
7. Critical Success Factors
Top down – Board/CEO
Embed in Strategy/Business Planning
Engage the business heads
Culture
Present / Reinforce
Repeat