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Top 12 actions for better risk management - Risk 2: Adjust your risk appetite periodically - EY - Global

Top 12 actions for better risk management

Risk 2: Adjust your risk
appetite periodically

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Leading firms are ensuring that they can draw upon at least five to seven years’ worth of quality operational data for their risk modeling and reverse stress-testing needs.

2. Set the risk appetite to include more secondary and tertiary factors and ensure that it is reviewed periodically according to the risk mandates of your clients and results from ICAAP stress tests.

Most asset managers already ensure that there is a clear and tangible articulation of their firm’s tolerance for risk appetite to improve the granularity according to developing market practices in the industry. The key difference in 2011 lay in two directions:

  1. More firms were considering secondary risk factors (e.g., investment, liquidity, legal, regulatory, fraud, country, settlement and enterprise risks) as well as some tertiary risk factors (e.g., strategic, systemic, correlation, concentration, depository liability, tax or accounting risks) in their planning.

  2. In marked contrast with the 2009 and 2010 surveys, more firms had crossed the Rubicon — not by merely setting risk appetite once a year and focusing primarily on soft qualitative elements, but by reviewing their statements more proactively and periodically. There was increasing evidence of firms revising their risk appetites during the year, setting quantitative and zero-tolerance elements, and performing trend analysis, such as emerging risks.

Firms are encouraged to pay close attention to the direction their peer group is heading, and be mindful that, eventually, they will be on the hook evidentially for any documents that are published externally. Asset managers should also appropriately balance responsibilities between the business and control functions such as risk, compliance and internal audit.

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