Four imperatives for risk governance in a new era

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The Senior Supervisors Group (SSG) noted in March 2008 that financial institutions would “face increasing pressure to understand the risk they face, to measure and assess such risks appropriately, and to take the necessary steps to reduce, hedge, or otherwise manage such risk exposures.” The SSG is made up of senior financial supervisors from the following seven countries: United States, Canada, France, Germany, Japan, Switzerland and United Kingdom.

With the benefit of hindsight, this seems like a considerable understatement.

Since the early days of the financial crisis, leaders both within and outside the financial services industry have highlighted the need for boards to improve in the area of risk governance. Key imperatives include:

1. Setting risks in a strategic context.
Board-level risk discussions must take place in the context of firm strategy and performance goals. Board leaders recognize their responsibility to actively challenge management on the question of whether the firm has the necessary resources, including financial and human capital, to be successful in executing the firm's strategy.

2. Ensuring risk appetite is more clearly defined and better understood.
Board leaders view risk appetite as perhaps the most critical component of an overall board-level risk policy, because it acts as a clear statement of the firm's strategic intent. Members need to have greater, and more constructive,, involvement in their firms' decisions regarding risk appetite. Challenges related to risk appetite include clarifying the board's role, developing well-informed definitions and communicating to external stakeholders.

3. Defining the risk governance agenda.
In the post-crisis era, bank boards need to clearly define the risk governance responsibilities they will assume. Many board members remain more actively engaged on a broader set of risk priorities than they were before the crisis. Capital allocation, new business risks and risk-adjusted compensation are all issues that have risen in importance on the board's agenda in the current environment.

4. Enhancing the board's understanding of risks.
To support robust discussion and debate on risk matters, directors require high-quality information and insight from both within and outside the firm. Streamlining risk communications to the board, establishing a productive relationship with the chief risk officer (CRO) and drawing upon independent risk perspectives all contribute to building the board's risk knowledge.

Download “Risk governance in a new era” for more information.