Risk Appetite  &  Risk Tolerance Improving their application from the Abstract to Concrete in your existing Risk Framework
Nicely Done Don Rumsfeld The Unknown As we know,  There are known knowns.  There are things we know we know.  We also know...
Vague terms defined by vague terms <ul><li>Accounting  </li></ul><ul><li>Probable </li></ul><ul><li>Highly Probable </li><...
Starting Point: Hierarchy Market Credit Operational Risk Appetite, Tolerance, and Limits are not static. Drivers include m...
Shaping the Definitions Market Credit Operational Set it too high, can lead to disaster. Set it too low = opportunity loss...
Defined with Consequences Forecast, Expected Range Reserves, Rate Pass Through Mechanism, Budget Cuts Rate relief, other s...
The Roles in Defining Risk Capacity, Appetite, Tolerance <ul><li>Approving Values </li></ul><ul><li>Approving the Risk Man...
RISK RANGE RISK TOLERANCE With a clearly established value and description of how risk tolerance is calculated, and a reso...
Further Development Teach, Sell  <ul><li>Risk Terms in context with consequences and actions </li></ul><ul><li>Awareness <...
Discussion <ul><li>I am interested in your ideas and experiences in establishing and utilizing the terms “Risk Appetite” a...
Upcoming SlideShare
Loading in …5
×

Risk Appetite & Risk Tolerance: Improving their application from Abstract to Concrete in your Existng Risk Framework

2,867 views

Published on

Creating a hierarchy for vague risk terms and customizing their definitions in terms of consequence to enable better management of your business.

Published in: Economy & Finance, Business
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,867
On SlideShare
0
From Embeds
0
Number of Embeds
28
Actions
Shares
0
Downloads
235
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Risk Appetite & Risk Tolerance: Improving their application from Abstract to Concrete in your Existng Risk Framework

  1. 1. Risk Appetite & Risk Tolerance Improving their application from the Abstract to Concrete in your existing Risk Framework
  2. 2. Nicely Done Don Rumsfeld The Unknown As we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don't know We don't know. — Feb. 12, 2002, Department of Defense news briefing
  3. 3. Vague terms defined by vague terms <ul><li>Accounting </li></ul><ul><li>Probable </li></ul><ul><li>Highly Probable </li></ul><ul><li>Likely </li></ul><ul><li>Material </li></ul><ul><li>Risk Management </li></ul><ul><li>Risk Capacity </li></ul><ul><li>Risk Appetite </li></ul><ul><li>Risk Tolerance </li></ul>When would these definitions change?
  4. 4. Starting Point: Hierarchy Market Credit Operational Risk Appetite, Tolerance, and Limits are not static. Drivers include market events, weather, economy. Risk Capacity Risk Appetite Risk Tolerance Risk Target or Range Risk Limits
  5. 5. Shaping the Definitions Market Credit Operational Set it too high, can lead to disaster. Set it too low = opportunity loss. Capacity = Able Appetite = Willing Tolerance = Maximum per broad classification Target or Range = Optimal level desired Limits = Threshold to control
  6. 6. Defined with Consequences Forecast, Expected Range Reserves, Rate Pass Through Mechanism, Budget Cuts Rate relief, other suboptimal resources Capacity= Least desired Appetite = If further short of “Range” than Is covered by your first source of relief Where does relief come from? Tolerance = if short of making your “Range” What is the first source of relief? Target or Range Limits
  7. 7. The Roles in Defining Risk Capacity, Appetite, Tolerance <ul><li>Approving Values </li></ul><ul><li>Approving the Risk Management Levers </li></ul><ul><li>Measuring the Risk </li></ul><ul><li>Reporting the Risk </li></ul><ul><li>Building the model </li></ul><ul><li>Owning and Feeding the Model </li></ul><ul><li>Adjusting Values as the environment changes </li></ul>
  8. 8. RISK RANGE RISK TOLERANCE With a clearly established value and description of how risk tolerance is calculated, and a resourced process around it, you are on the right path for avoiding surprises. Familiar?
  9. 9. Further Development Teach, Sell <ul><li>Risk Terms in context with consequences and actions </li></ul><ul><li>Awareness </li></ul><ul><li>Process </li></ul><ul><li>Model </li></ul><ul><li>Measure </li></ul><ul><li>Monitor </li></ul><ul><li>Report </li></ul><ul><li>Take Action </li></ul>Use Build
  10. 10. Discussion <ul><li>I am interested in your ideas and experiences in establishing and utilizing the terms “Risk Appetite” and “Risk Tolerance”. </li></ul><ul><li>Recent discussion I have been following on this is on Linkedin on the ERM Association Group. </li></ul>

×