One of the key challenges for the CRO and the executive teams of many large financial services organisations to emerge over the last couple of years has been the alignment of risk appetite to strategy and ensuring that the business is ‘operating within appetite’. This means operating within the appetite of the board, and by implication, the regulator. Meeting this challenge can have a transformational effect on the role of the CRO and the risk function, but also on the role of risk management – transforming it from a compliance driven activity to a source of competitive advantage.
On a continuing basis the CRO should seek to ensure that risk originators in individual business units within the entity are fully aware of, and aligned with, the board’s appetite for risk.
The Walker Review into corporate governance of UK Banks and other financial industry entities, completed in July 2009 raised risk appetite as a key issue for boards and executives within the financial services industry.
Section 6.17 explicitly states that the CRO has a duty to ensure that the risk takers are taking risks in alignment with the organisational strategy.
To quote directly from the Walker Review - CRO would be expected to assess, independently of the executive in individual business units, whether a proposed product launch or the pricing of risk in a particular transaction is consistent with the risk tolerance determined by the risk committee and board and should be able to exercise a power of veto where necessary. On a continuing basis the CRO should seek to ensure that risk originators in individual business units within the entity are fully aware of and aligned with the board’s appetite for risk. There may have been historically a tendency for business units to be resistant to the CRO who is seen as getting in the way of their ability to undertake what they see as attractive business. Any residual attitudes of this kind must be changed and the independent authority of the CRO put beyond doubt.
StratexPoint is designed specifically to create a collaborative approach to risk management and risk taking where the risk management function is an enabler of strategy execution by working with the front line, where risk is taken, to help them understand where they are taking too much risk but also where more risk can be taken. Enabling the business to take more risk is not historically the role of the risk management function, but if the CRO and the risk management function is to add real and significant business value, they must work with the business to build and exploit the firm's risk-taking capabilities to take on higher risk (and higher reward) business thus building competitive advantage.
One of the key tools to enable the organisation to monitor the alignment of risk taking to strategy and understand where more risk can be taken is the StratexPoint Appetite Alignment Matrix.
This tool enables the business to understand if they are ‘operating within appetite’ and it enables the CRO and the risk management function to work with the business to identify where more risk can be taken, transforming ‘risk management’ into a tool for competitive advantage rather than a compliance activity.