Principles for Effective Risk Appetite

Increasing the intensity and effectiveness of supervision is a key component of the Financial Stability Board’s (FSB’s) framework, endorsed by G20 Leaders, to reduce the moral hazard of systemically important financial institutions (SIFIs). As such, supervisory expectations for risk management particularly at SIFIs are increasing. The October 2011 FSB progress report on enhanced supervision noted that effective risk appetite frameworks (RAFs) that are actionable and measurable by both financial institutions and supervisors have not yet been widely adopted. It concluded that the development of an effective RAF is important for financial institutions and supervisors, and needs attention by both. The report recommended that supervisors discuss expectations for what a “good” risk appetite framework entails and how to supervise against these expectations.