Key Quotes from Walker Review regarding Risk Appetite

Section 2.9 - One abundantly clear lesson from recent experience is the need for heightened and intensified BOFI board focus, above all in monitoring risk and setting the risk appetite and relevance parameters which are at the heart of the strategy of the entity.

Section 6.3 - The focus in this Review is on how governance of risk by the boards of BOFIs can be made more effective alongside such enhanced regulation and supervision. In the past, some boards may have seen risk oversight as a compliance function essentially designed to meet regulatory capital requirements at minimum constraint on leveraged utilisation of the balance sheet. There has probably also been an element of “disclosure fatigue”, leading to some sense that a large part of the board’s obligations in respect to risk in the entity can be discharged through full disclosures. Such attitudes should have no place in the proper governance of risk in future. In essence, the obligation of the board in respect to risk should be to ensure that risks are promptly identified and assessed; that risks are properly controlled; and that strategy is informed by and aligned with the board’s risk appetite.

Section 6.5 - Enhanced effectiveness in the governance of risk will require in many BOFIs more dedicated board focus, above all in reviewing and deciding the entity’s risk appetite and tolerance. A key distinction here is between the responsibility of the board in the management and control of risk and decision-taking in respect to risk appetite and tolerance.There is a substantial toolbox of tried and tested techniques for the management and control of financial risk. A BOFI board that failed to draw on the experienced embedded in such techniques to ensure that appropriate management and control processes are in place would be in serious breach of its responsibilities.

Section 6.5 - Closely-related but separate responsibilities are the critically important oversight of current risk in real-time, in the sense of approving and monitoring appropriate limits on exposures and concentrations; and the determination by the board of its risk tolerance and risk appetite through the cycle and in the context of future strategy. This is largely a forward-looking focus.

Section 6.9 - A risk committee cannot make recommendations to the board about risk appetite without taking a view on capital and its prospective adequacy over the cycle in the light of the entity’s overall strategy and the external risk environment.

Section 6.10 - The guidance on internal controls (the Turnbull guidance) issued under the Combined Code was designed for all listed companies, and places particular emphasis on the internal control and management of risk. This important guidance is plainly applicable to BOFIs, but the exceptional characteristics of banking business and the associated externalities point to the need for further guidance for those institutions, above all on the forward-looking process for determining risk appetite.

Section 6.17 - 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.

Section 6.28 - The principal purpose of the risk report will be to assist shareholders through improving their understanding of the governance of risk-taking and of the risk appetite and performance of their investee company, which is a consequence of the business strategy being pursued.

Read the full Walker Review of Corporate Governance of UK Banking Industry