Risk Appetite and Risk Culture: A Regulatory View

Michael Alix

Financial organisations seeking to instill a strong risk culture – behaviours among business leaders, risk managers and risk takers that align with the expectations of directors and senior management – need to provide clear and consistent leadership, guidance and incentives to shape attitudes and achieve acceptable long-term results. Supervisors increasingly expect boards of directors and senior management to communicate guidance on strategy and risk taking clearly and effectively, and to test whether the actions taken and risks assumed are within levels desired. Since the early 2000s, for many firms this process has been either ineffective or non-existent.

The experience of the financial crisis of 2007–08 and beyond has demonstrated the need for stronger articulation by directors and senior management of desirable and undesirable risks, explained in the context of the firm’s business model, strategy and external conditions. Careful articulation of so-called “risk appetite”, and effective processes to ensure that any risks taken are within the set of acceptable risk parameters, are necessary for regulators and supervisors to gain comfort that the organisation is reasonably