Principles for an Effective Risk Appetite Framework
The FSB Principles set out key elements for: (i) an effective risk appetite framework, (ii) an effective risk appetite statement, (iii) risk limits, and (iv) defining the roles and responsibilities of the board of directors and senior management. The Principles aim to enhance the supervision of systemically important financial institutions but are also relevant for the supervision of financial institutions and groups more generally, including insurers, securities firms and other non-bank financial institutions. An appropriate risk appetite framework (RAF) should enable risk capacity, risk appetite, risk limits, and risk profile to be considered for business lines and legal entities as relevant, and within the group context. The FSB Principles are high level to allow financial institutions to develop an effective RAF that is institution-specific and reflects its business model and organisation, as well as to enable financial institutions to adapt to the changing economic and regulatory environment in order to manage new types of risk. Establishing an effective RAF helps to reinforce a strong risk culture at financial institutions, which in turn is critical to sound risk management.