Chapter 5 - Risk appetite Flashcards
what is Risk appetite
the amount of risk an organization is ready to take in pursuit of its strategic objectives
who is responsible for monitoring and internal controls are such that the firm operates within its risk appetite
the board
who is directly named as responsible for determining risks
board members
key roles of the risk function
define risk appetite.
monitor risk, ensuring it’s within risk appetite
advise important decisions, challenge unacceptable risks
why does risk appetite struggle for acceptance
- reluctance to uncover inner contradictions
- the suggestion of “appetite.” Why would you have appetite for risk?
what are preferred terms to risk appetite
risk tolerance /risk acceptance
When loaning to corporates or individuals, what will banks calibrate its interest rate with
the risk of debtor default
what are the clearly defined returns of Credit risk and market risk
credit margin and capital gains
what is a credit risk policy
another name for a risk appetite statement for credit risk
what is a market risk policy
risk appetite statement for market risk
which companies have very little revenue from financial activities
Industrial and technological companies
where do Industrial and technological companies get revenue from
operational activities
Risk management is called operational risk management only
in which sector
financial sector, to distinguish it from credit and market risks
Return of operational risks for financial firms
fee income and return from new revenues with new products and operations
tail risks
large downsides at rare occurrence
what must the benefits of operational risk always be balanced with
the potential for damage or even devastation
What do many risk appetite statements fail to specify
how to avoid these events
what is the primary objective of risk appetite
to guide the level of risk-taking and necessary controls within the organization
what determines risk exposure and therefore inherent risks
the mission and strategy of the organization
what are the 5 elements of a comprehensive risk appetite framework
Risk appetite
Risk tolerance
Key controls
Risk limits
Governance
what is the benefit of Turning funnel steps into a table
creates an actionable risk appetite structure
what is the usual way of organizing risk appetite
risk categorization
what is the format of Risk appetite statements
qualitative and organized according to risk categories
To define their appetite level, some firms have replaced the classic “low – medium – high” with what?
“Averse,” “Cautious,” “Open” and “Seeker”/“Hungry.”
