The Chief Risk Officer is the individual (and leader of the function) that defines the firm’s risk appetite and tolerance, and helps maintain operations within the dimensions of such appetite.

The CRO is talented and experienced of course. But critically, she (read interchangeably with ‘he’) understands that a pro-active approach with a commitment to value-added perspective creates a leadership role for Risk Management in the firm and a ‘seat at the table’. We have to say adieu to the days of Risk being a ‘control’ or a ‘support’ function or a ‘let’s just keep the Regulators happy’ strategy – that can only happen if Risk steps up to the plate.

1. Vital to ensuring the CRO’s inclusion at the governance level is that she

a) Defines and dimensions the firm’s risk appetite and tolerance/s, and creates the mechanisms to articulate and communicate this across the firm.

b) Provides strategic perspective with direct lines of communication to the Board and the CEO on what’s going on in markets, businesses and the legal-regulatory environment (and what is on the horizon) that impacts risk levels and the risk appetite of the firm holistically. Specifically, she relates the growth and business of a firm to the evolution of its risk appetite.

c) Stays on point with the risk function, meaning she does not get bogged down in other board business! She is simply the lead advocate for responsible risk management across the firm.

2. Tactically, as the manager of an independent and objective risk organization of the firm, the CRO implements its risk appetite and tolerance through an infrastructure of people, technology and dynamic communications across all stakeholders. The fundamental role of the risk manager is to oversee and continually test for “compatibilities” of a firms risk-taking with

i. Its risk appetite (contextualized for the legal-regulatory environment)

ii. Products and markets through which risk is taken

iii. Returns for taking such risks

The CRO lays down the principles, policies and practices that benchmark the business-as-usual and the “unusual, unintended, and unacceptable” risk-taking in the firm. She simultaneously implements measurement and management practices that ensure reconciliation with the top.

3. As custodian of risk appetite, the CRO dynamically redeploys the Economic Capital of the firm(it is time we got the CFOs out of this role) among various competing business units process of doing so computes and compares risk-adjusted performances across the firm using RAROC, RORAC, RORC, NIACC or any of such measures as long as consistently applied (anything but

ROE as long as C figures in it, please !!)

Simple? No

Critical for survival? Maybe

At least a key differentiator with some promise of resilience? Yes

Posted by Jaidev Iyer, MD, GARP at 9:28 AM