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Nematrian Reference Library

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Introduction (partial) "Regulatory pressures, such as Basel II and a greater focus on corporate governance, have been a stimulus for many changes in the industry - one of these has been the recognition of the need to articulate risk appetite more clearly. On the face of it, this may seem easy to do. After all, is it not simply a combination of an institution’s desired credit rating, regulatory capital structure and the relevant solvency needs which set the ability of the institution to withstand shocks and therefore represent its risk appetite? For some smaller firms this approach may well be enough, but for others risk appetite is a more complicated affair at the heart of risk management strategy and indeed the business strategy. Defined well, risk appetite translates risk metrics and methods into business decisions, reporting and day-to-day business discussions. It sets the boundaries which form a dynamic link between strategy, target setting and risk management. Risk appetite is of course in the eye of the beholder (if the reader will excuse a mixed metaphor!). Different parts of the organisation and external stakeholders have different perspectives. Equity investors’ appetite for risk will differ from that of the rating agencies. Equity investors want to see a return; rating agencies want to minimise risk of default. The regulator’s perspective differs from management’s which differs from that of customers, employees, bondholders etc. Consequently, articulating risk appetite is a complex task which requires the balancing of many views."

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