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    Risk Appetite in Banking: Steve Townsend Tesco Bank

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    rakhalbangla
    This document discusses risk appetite in banking. It defines risk appetite as the level and type of risk a bank is willing to assume given its business objectives and obligations. The document then discusses how banks can fail due to insufficient capital or liquidity, and links risk appetite to strategic objectives through setting strategic risk measures in areas like financial risk, reputational risk, and operational risk. It also covers using risk appetite to set capacity limits and triggers, integrating stress testing into business planning, and some of the critical success factors and challenges in implementing an effective risk appetite framework.

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    Risk Appetite in Banking: Steve Townsend Tesco Bank

    Uploaded by

    rakhalbangla
    39 views15 pages
    This document discusses risk appetite in banking. It defines risk appetite as the level and type of risk a bank is willing to assume given its business objectives and obligations. The document then discusses how banks can fail due to insufficient capital or liquidity, and links risk appetite to strategic objectives through setting strategic risk measures in areas like financial risk, reputational risk, and operational risk. It also covers using risk appetite to set capacity limits and triggers, integrating stress testing into business planning, and some of the critical success factors and challenges in implementing an effective risk appetite framework.

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    4SteveTownsend-riskappetiteinbanking

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    This document discusses risk appetite in banking. It defines risk appetite as the level and type of risk a bank is willing to assume given its business objectives and obligations. The document then discusses how banks can fail due to insufficient capital or liquidity, and links risk appetite to strategic objectives through setting strategic risk measures in areas like financial risk, reputational risk, and operational risk. It also covers using risk appetite to set capacity limits and triggers, integrating stress testing into business planning, and some of the critical success factors and challenges in implementing an effective risk appetite framework.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    39 views15 pages

    Risk Appetite in Banking: Steve Townsend Tesco Bank

    Uploaded by

    rakhalbangla
    This document discusses risk appetite in banking. It defines risk appetite as the level and type of risk a bank is willing to assume given its business objectives and obligations. The document then discusses how banks can fail due to insufficient capital or liquidity, and links risk appetite to strategic objectives through setting strategic risk measures in areas like financial risk, reputational risk, and operational risk. It also covers using risk appetite to set capacity limits and triggers, integrating stress testing into business planning, and some of the critical success factors and challenges in implementing an effective risk appetite framework.

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    You are on page 1of 15

    Risk

    Appetite in
    Banking

    Steve Townsend
    Tesco Bank
    Agenda
    1. Risk Appetite
    2. How a bank fails - Capital & Liquidity Risk
    3. Linking Risk Appetite to Strategy
    4. Strategic Risk Measures
    5. Capacity, Limits & Triggers
    6. Stress Testing & Business Planning
    7. Critical Success Factors & Challenges
    Questions?
    1. Risk Appetite

    A Regulatory Requirement!
    1.1 Risk Appetite Definition
    ‘Risk appetite is the level and type of risk a firm is willing to assume
    in its exposures and business activities, given its business objectives
    and obligations to stakeholders.’

    Risk appetite is generally expressed through both quantitative and qualitative means and should consider
    extreme conditions, events and outcomes. In addition, risk appetite should reflect potential impact on earnings,
    capital and funding / liquidity.
    2. How a bank fails

    Not enough liquidity

    Not enough capital

    …… or both!
    2.1 Capital Risk

    Macro economics

    Credit losses / Bad debts

    Volumes

    Margin erosion

    Pension deficits

    Rogue trading losses


    2.2 Liquidity Risk

    New bank: £10,000 capital Established bank: £10bn capital

    1. Accepts Deposit £100k – 1. Accepts Deposits £100bn -


    Instant Access Instant Access

    2. Lends £100k mortgage for 25 2. Lends £90bn mortgage for 25 years


    years
    3. Retains Liquidity buffer £10bn
    3. Depositor requests £100,000
    withdrawal 4. Depositors request £15bn
    withdrawals

    5. Bank borrows £5bn

    Bank can’t pay – insolvent Bank can pay – solvent

    But no loss and £10,000 capital is intact Still no loss and £10bn capital is intact
    3. Risk Appetite: Linking Risk Appetite to Strategy
    Strategic Business Objectives

    Profit
    Customer
    volatility and Regulatory Customer Group Scale and
    service & People/Values
    return on compliance loyalty strength efficiency
    products
    capital

    Customer
    Experience

    Strategic Risk Objectives

    Financial Reputational Operations


    Risk Risk & People

    Acceptable Profit Volatility A positive stakeholder A fit for purpose,


    & Financial Strength perception scalable operating model

    Strategic Risks
    Profit Financial Market
    Market Customer Regulatory
    Regulatory 3rd Party & Process People Technology
    Financial Strength
    Volatility Strength Reputation
    ReputationExperience Compliance
    Compliance Outsourcing

    8
    4. Risk Appetite: The Strategic Risk Measures
    FINANCIAL RISK REPUTATIONAL RISK OPERATIONS & PEOPLE RISK

    Profit Financial Market Customer Regulatory 3rd Party &


    Process People Technology
    Volatility Strength Reputation Experience Compliance Outsourcing

    - Profit 1 in 20 - Debt rating - Change


    - Capital ratios - Customer Retention - Staff Attrition
    - Liquidity - Complaints - IT availability
    - Regulatory engagement - Change
    - Systems integrity
    - Outsourcing/Suppliers

    9
    5. Risk Appetite: Capacity, Limits & Triggers

    Exposure

    Capacity
    Exposure

    Limit
    Exposure
    Trigger
    Exposure

    Exposure

    Risk Profile Risk Profile is Risk Profile Risk Profile is Risk Profile is
    significantly within appetite approaching outside appetite outside Capacity
    lower than appetite limit
    appetite

    10
    6. Stress Testing & Business Planning
    Capital Stresses
    Macro-economic 1 in 20
    • GDP
    • Interest rates
    • House prices
    • Inflation
    • Unemployment

    Bank specific risks


    Liquidity stresses
    • Run on the bank
    • Funding market closure
    • Wholesale rollovers
    • Pipeline control failure
    6.1 Business Plans and Recovery & Resolution

    Target
    operating Business
    Triggers range Plan
    Limits range

    Stress
    buffer
    Stress
    Capacity Testing
    Recovery
    Point of Non zone
    Viability

    impact Resolution
    time
    7. Critical Success Factors

    Top down – Board/CEO

    Embed in Strategy/Business Planning

    Engage the business heads

    Culture

    Present / Reinforce

    Repeat
    7.1 Challenges

    Probabilities
    Non financial measures

    Change

    Culture

    Business engagement
    Risk Appetite

    Q&A

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