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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

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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

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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

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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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