Case study 2: Public Risk Appetite Statements Disclosed by a Financial Organization Consider the risk appetite statements disclosed by a major U.K.- based financial organization in its annual report. For this organization, risk appetite is defined using a combination of qualitative and quantitative statements. "Risk appetite is the amount and type of risk that [the organization] regards as appropriate for it to accept in order to execute its strategy. The board regularly reviews and sets this in the form of 10 risk appetite statements, which it sets in the context of [the organization’s] strategy and the requirements of various stakeholders, including the regulatory framework in which we operate." The risk appetite statements provide the benchmark against which the company’s risk profile is reported, monitored and managed by the board, audit and risk, finance, and risk assurance committees. Risk appetite also forms the basis for the calibration and setting of the delegated authorities and financial limits for all aspects of market, credit, liquidity and operational risk. The 10 risk appetite statements address both quantitative and qualitative aspects of risk taking. The quantitative risk appetite statements address: • maximum tolerance for market, credit and operational losses • the maintenance of a minimum credit rating level • minimum economic and regulatory capital surpluses • the maximum earnings volatility • minimum excess liquidity resources to meet peak stressed liquidity requirements without the need to liquidate assets or raise capital The qualitative risk appetite statements address: • regulatory risk • reputation risk • business mandate • operational risks in the execution of business plans • risk-related decision making, especially in relation to new business opportunities The statements express the organization’s risk-taking approach for its internal and external stakeholders. The statements paint a "portfolio" view of the organization’s willingness to bear and pursue risk for an expected return. It represents a collection not only of the risk types related to the business portfolio (qualitative statements) but of its overall enterprise financial appetite (quantitative statements). What is not clear—looking only at the statements themselves—is how these risks relate to each other within the organization’s overall risk portfolio. The public statements of the company do not indicate whether this particular organization uses an efficient frontier model to consider the interrelatedness of its risk/return decisions in a portfolio view. However, it may be safe to assume that at least some portions of its risk portfolio are considered in this way
QUESTION TWO (BASED ON CASE STUDY 2: PUBLIC RISK APPETITE STATEMENTS DISCLOSED BY A FINANCIAL ORGANIZATION) [25]
2.1 Critically analyse four (4) sources of consequential losses. (12)
2.2 I your opinion, what is the meaning of risk identification. (5)
2.3 Describe the benefit of the risk identification process to businesses. (8)
Refer strictly to the discussion in the case study to ensure that your answers apply. Should you find that the particular case study does not assist you in answering you may draw from the other cases.