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Hello,
I would appreciate some feedback.
On page 8 of the BCBS article (on stress testing), the author says ‘senior management should be able to identify and clearly articulate bank’s risk appetite”.
On pg 2 of the new articles (‘Funding Liquidity’) author says ‘responsibility for liquidity risk tolerance of a firm lies with its governing body, which must define and control the firm’s liquidity risk appetite”
Can I conclude that risk appetite for Stress testing should be identified at the senior management level, but that the risk appetite for liquidity risk is at the governance level?
Thanks
HH,
My view – and I could be completely off the mark here – is that terms such as risk tolerance, risk appetite, risk aversion, even the meaning of risk itself, governance, management committees, senior management, governing bodies etc are not very authoritatively defined anywhere in the risk world. Often, the same term is used in slightly different ways by different authors and bodies and national regulators.
In many cases, it just depends upon the context. If you read the PRMIA material, and compare it to another text book, or even to pronouncements by the BCBS, the Fed, the FSA, RBI, there can be enough to pick on in terms of apparent contradictions. Yet to do so would be completely missing the point, because such differences in terminology do not (or should not) take away the underlying purpose of these pronouncements, which is to manage risk in the financial system.
I would probably not worry or think too much about these minor differences in language, and what I would take from the both the papers is merely that the responsibility for how much risk to accept (whether defined as risk appetite or risk tolerance) lies with the most senior people in an organization. I would be surprised if PRMIA tests you on such semantics, but if they do, I would be quite disappointed at what they are focusing on.
Mukul Pareek
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