Managing Risk in Cards Portfolios: Risk Appetite and Limits

Abstract

We describe an important risk management tool at financial institutions, risk appetite frameworks. We observe those frameworks for credit cards portfolios at four large banks and analyze when and why banks adjust them. The risk appetite frameworks for these banks monitor 40 to 150 metrics. We focus on metrics related to outstanding balances of which we identified 79. Overall, we find that these frameworks are sticky. Most adjustments occur during scheduled annual reviews and are relatively limited. Limit breaches are rare. Thresholds are often changed the month after a breach or after the utilization rate crossed 90 percent, but most breaches imply risk mitigating measures such as tightening credit standards. Notably, managers’ reactions were even stickier in the pandemic period.

Keywords: banking supervision, risk management, risk limits, risk appetite framework, credit cards

JEL Classification: G32, G21, G38