Risk Accountability and Risk Appetite: Enhancing Risk Culture

Abstract

The magnitude of risk taking that was revealed by the financial crisis has led to increased attention being placed on risk culture and governance of financial institutions. The “three lines of defense” model is often used in risk management, with the second line (independent controls) usually being emphasized. However, it is the first line of defense, the business line, where the emphasis should lie, as it is closest to financial risks and it is where leaders can influence risk taking behaviors, including conduct. A framework needs to be developed within banks, which supports clarity in both the business line and control functions, especially with regards to the risk appetite of the board.

This article looks at the changes that are needed in terms of accountability frameworks, and the role of risk appetite within firms and how it can be used to delineate the accountability of the business line and leaders. There will also be discussion of changes that are needed to risk metrics, and how risk transparency is necessary in order to use the risk management model effectively.