Examining Risk Governance Practices in Global Financial Institutions: The Adoption of Risk Appetite Statements

Abstract

Heightened risk governance standards have become increasingly prevalent in financial institutions following the global financial crisis, apportioning greater responsibilities upon board directors. One such responsibility of the board is the requirement to formally articulate and monitor firm-wide risk appetite. For the first time, this study probes the risk appetite practices of global financial institutions, collected through a series of semi-structured interviews with risk governance actors. We find that the practice of establishing firm-wide risk appetite has a profound impact upon firms’ activities. Before the crisis, many boards lacked a clear understanding of risk profiles, limiting effective internal monitoring. Following the adoption of risk appetite, firms appear to improve monitoring and take into account aggregate risk levels. Moreover, there are signs that the cascading of risk appetite may contribute to improved risk conduct levels. This research is relevant to academics, providing insight for research into this emerging board-level practice. For practitioners, this study offers a unique lens to benchmark their monitoring activities for the first time.

Keywords: Risk governance