Next-Generation Risk Appetite Management: Getting Real About Achieving Impact in Uncertain Times

by Cubillas Ding, March 22, 2016
Industry Trends
Global

Abstract

Celent presents strategic principles and tactical levers for success that can enable firms in their risk appetite implementation initiatives.

Prompted by regulator and investor pressures, most financial institutions have completed formal “first generation” exercises to establish Risk Appetite Statements (RAS), with some adopting more sophisticated next-generation capabilities to manage their tolerance and capacity for risk-taking. Nevertheless, despite encouraging progress, there is work left to be done.

As discussed in this report, Next-Generation Risk Appetite Management: Getting Real About Achieving Impact in Uncertain Times, firms are at various stages in their journey, yet wide disparities can still exist in the degree that they have operationalized and embedded risk appetite within their organizations, and the influence that risk appetite has on key decision-making processes.

The challenges reflect a complex interplay of soft and hard factors that sway the efficacy of a firm's risk appetite initiatives, such as risk culture change management, internal buy-in, performance/compensation alignment, and the timely and accurate integration of processes, reporting applications, and data ecosystems across various levels within the firm.

With corporate scandals and conduct-related effects manifesting for years after the financial crisis (and continuing), the divergence between “what you say” and “what you do” is becoming unpalatable. Firms which are caught up in corporate behavioral debacles are often slapped with hefty regulatory fines and significant falls in market capitalization.

“Anecdotal evidence suggests that, in the long term, firms which are consistent in what they say and do attract ‘positive multiples’ in terms of valuations and good will. This can decrease the drag of regulatory fines and remediation efforts,” says Cubillas Ding, a research director with Celent’s Securities & Investments practice and author of the report. “In this regard, there are tangible benefits to tangible management of risk appetite.”

This report contains six figures and tables.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

 

Key Research Questions

1

Risk Appetite: Who You Are and Who You Want to Be

2

 

The State of Play

2

 

Challenges and Gaps

2

Strategic Connectedness: Say What You Do and Do What You Say

5

 

Raising the Bar Toward Next-Generation Paradigms

5

 

Covering All Bases: The Imperative of Making Risk Appetite Initiatives Tangible

6

 

Making It Real: Levers for Success

8

Closing Thoughts

13

Leveraging Celent’s Expertise

14

 

Support for Financial Institutions

14

 

Support for Vendors

14

Related Celent Research

15

Sign in to download reports and access personalized information