Resolving the disconnect between risk appetites, tolerances, exposures and monitoring measurements

Abstract

The asset management industry’s approach to risk management is continually evolving. A concentrated focus has been invested to develop risk appetite statements (RAS) and internal capital adequacy assessment process (ICAAP) reports. Guidance documentation and surveys often state that there are disconnects between the RAS, ICAAP, other risk processes and decision-making activities across firms. Resolving these disconnects enhances the integrated business profile reports submitted to committees, which ultimately drives how senior management decides to allocate resources. Not resolving these disconnects hinders a firm’s ability to grow and meeting strategic objectives. Risk management consists of multiple estimates — whether day-to-day or once-in-a-lifetime risk exposure assessments — and, as with all estimates, there are multiple ways to obtain a reasonable result based on relevant data and assumptions, but not without a certain level of subjectivity. It is therefore important to note that this paper provides one possible solution for resolving disconnects in risk processes, but its success is dependent on robust governance and proper business planning. The risk processes referred to in this paper relate to the risks facing the asset management business and not the risks contractually borne by its clients.