Risk Appetite Framework Reshaping and integration into budget processing

The client is the subsidiary of a large banking group in France, which is active in Asset & Wealth Management, Corporate & Investment Banking, Insurance and Specialized Financial Services and Payments areas.

THE CHALLENGE

As part of the annual review of the Risk Appetite Framework, the clients decided to reshape and redesign its framework to better integrate it with other internal processes such as the strategic plan, the budget process and the ICAAP. This reshaping consists of:

• Strengthening the risk inventory to better link it with the business model (combined top-down and bottom-up view).
• Defining a unique materiality grid and implement a unique materiality assessment process for key processes (RAF, ICAAP …).
• Defining all relevant indicators.
• Redefining the thresholds tolerance in a more dynamic way.
• Strengthening the governance as well as the escalation process and the linkage with the other processes.

APPROACH AND SOLUTION

After a gap analysis conducted by Avantage Reply and discussed with the client, the roadmap of the reshaping covered the investigated key building blocks. The team deployed included experienced subject matter experts to provide support and project management on each building block described below:

Risk appetite governance and validation process:
• Tolerance thresholds governance and escalation process (threshold breach, amend/change of threshold…).
• Supporting documents associated to RAF governance, the RAF validation process and other related documents.
• Linkage between the RAF and other internal processes (strategic planning, budget process, ICAAP, stress tests…)
• Interactions and contributions to the risk dashboard (including ongoing initiative on its digitalisation)

Risk identification and materiality assessment process:
• Enrich the risk inventory by challenging and completing the missing parts (definitions, granularity, bottom-up vs top-down, business’ and risk self-assessments).
• Summarize the approach retained for materiality assessment and the key outcomes of the exercise.
• Formalise and implement a unique process of risk identification and materiality assessment.

Metrics
• Identification, selection and enlargement of the list of key performance indicators and key risk indicators.
• Subdivision of the list considering the purpose including materiality assessment, risk appetite metrics at board level, risk appetite metrics for operational management (risk dashboard).

Dynamic tolerance thresholds approach
• Identification of all the mitigants.
• Improve the assessment of the Bank’s risk profile.
• Run a second net-risk assessment.

Dynamic tolerance thresholds approach
• Propose a new framework allowing to be more dynamic and consistent with key strategic processes

Risk culture
• Diffuse and cultivate a risk culture among stakeholders

RESULTS AND BENEFITS

The identified actions have been fully implemented, allowing the client to improve and validate at the Senior Management level the overall Risk Appetite Framework and better link it with the identified strategic processes. The review of the process allowed the client to better cover the missing perimeter and subsidiaries as well as strengthen quantification methodologies of the indicators.