June 15, 2011 - RiskMinds conference - Notes from presentation on Setting Risk Appetite in the New Regulatory Environment by Joseph V Rizzi:
"...Risk Appetite as a Process Not a Number…
- Need to incorporate capital structure and risk considerations as an input versus consequence of strategy
- Capital as cost of risk
- Return as cost of capital
- Risk as cost of return
Risk appetite links strategy, risk and capital –represents total risk exposure an organization is willing (and capable?) to accept and retain in pursuit of its strategy
…..
Manage risk but…live with uncertainty
Risk is not volatility
Beware pro-cyclical risk appetite
- Set too high in good times
- Reduced during bad times
Avoid just-in-time capital structures..."
Stay tuned for my next update from the RiskMinds conference.
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Editorial additions: Relevant resources and best practices:
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Databases house a higher percentage of confidential data than any other type of data repository.
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Replies
Sohayla,
Thanks for such a well-executed summary of Joseph Rizzi’s presentation at the RiskMinds conference.
In trying to understand the full implication of the point: “Need to incorporate capital structure and risk considerations as an input versus consequence of strategy,”
I think I take it to mean that the risks created by the market (e.g. historical issue and market volatility & shifts in yield curves) should be the inputs of certain risk models, since these risks are uncontrollable. It is the risks created by the investment decisions of the PMs (are a ‘consequence of strategy’) (e,g, allocations & selections), in light of these ‘input’ market risks, that are the risks that are under the control of the PMs and that need to be clearly distinguished from and separately evaluated from the input market risks. I would take this to be what distinguishes ex post and ex ante market-factor attribution, which explains risk in terms of uncontrollable market factors, from ex post decision attribution of active return and risk, which explains them in terms of controllable investment decisions.
If I correctly understand him in that this is what was behind this point of Rizzi, I believe it was a very important point he was making.