Op risk appetite: Do firms have a balanced diet?

With some operational risk managers not even in agreement as to the correct definition of op risk appetite, the topic seems to be one of the least well-managed in the industry. But understanding your firm’s op risk appetite is an essential ingredient for success

Financial services firms are still struggling to adequately set and manage operational risk appetite. Although there is no formal requirement under Pillar I of the Basel II Accord for firms to submit a statement of appetite for op risk, under Pillar II regulators are looking for banks to give an indication of their defined appetite and tolerance in this area. If a firm does not set an op risk appetite, it would be very difficult for it to pass the ‘use' test by demonstrating to regulators that