Many risk and compliance management professionals must understand the new RAF. No, not the Royal Air Force (RAF) . the Principles for An Effective Risk Appetite Framework (RAF), a key component of the Financial Stability Board’s (FSB’s) framework, endorsed by G20. Leaders, to reduce the moral hazard of systemically important financial institutions (SIFIs) and, surprise surprise. non-SIFIs. “For non-SIFIs, supervisors and financial institutions may apply the Principles proportionately so that the RAF is appropriate to the nature, scope and complexity of the activities of the financial institution”.Also, “an effective and efficient RAF should be closely linked to the development of information technology (IT) and management information systems (MIS) in financial institutions.“We have some great definitions as well: Risk appetite framework: The overall approach, including policies, processes, controls, and systems through which risk appetite is established, communicated, and monitored. It includes a risk appetite statement, risk limits, and an outline of the roles and responsibilities of those overseeing the implementation and monitoring of the RAF. The RAF should consider material risks to the financial institution, as well as to the institution’s reputation vis-Ã -vis policyholders, depositors, investors and customers. The RAF aligns with the institution’s strategy. Risk appetite statement: The articulation in written form of the aggregate level and types of risk that a financial institution is willing to accept, or to avoid, in order to achieve its business objectives. It includes qualitative statements as well as quantitative measures expressed relative to earnings, capital, risk measures, liquidity and other relevant measures as appropriate. It should also address more difficult to quantify risks such as reputation and conduct risks as well as money laundering and unethical practices. Risk capacity: The maximum level of risk the financial institution can assume g
