1. Linking Risk Appetite to Limits: A Quantitative Approach for Practitioners.
- Author
-
Sanyal, Goutam and Mukherji, Srishti
- Subjects
CREDIT risk ,GLOBAL Financial Crisis, 2008-2009 ,FINANCIAL security - Abstract
The concept of Risk Appetite gained new significance in the aftermath of the Global Financial Crisis (GFC). In its guidance on Risk Appetite in 2013, the Financial Stability Board (FSB) elucidated the features of an ideal Risk Appetite Framework (RAF), statements, limits etc., but stopped short of providing details for operationalizing Risk Appetite (RA), particularly in terms of limits. This paper attempts not only to define RA more precisely in quantitative terms, but also suggests a mechanism to operationalize the RA based on certain quantitative anchors. This addresses the crucial question of allocating the RA along business lines and provides a mechanism to track the risk profile of the portfolio against the limits. The paper uses a hypothetical corporate portfolio to demonstrate a practical translation of credit risk appetite into operational limits. Since the appropriateness of RA is often tested during macroeconomic downturns, this paper links the appetite setting process to stress testing. [ABSTRACT FROM AUTHOR]
- Published
- 2022