To curb excessive risk-taking by financial institutions, the Financial Stability Board has issued detailed guidelines including fixing responsibility on senior management for strong risk management strategies.
Besides putting the onus on the board and other senior executives, including CEO and CFO, the FSB principles require financial institutions to ensure that risk norms are "reflected appropriately in strategic business plans".
The 'Principles for An Effective Risk Appetite Framework' is part of efforts of G-20 nations, including India, to put in place an effective supervision mechanism to reduce the moral hazard of systemically important financial institutions.
FSB, which works to ensure global financial stability, represents entities from 24 nations and jurisdictions, including India, and international financial institutions, among others.
Under the principles, released on Monday, financial institutions should consider material risks as well as those to its reputation especially with regard to policyholders, depositors, investors and customers.
FSB has suggested financial institutions to have risk appetite that is consistent with their "short and long term strategy, business and capital plans, risk capacity as well as compensation programmes" besides being in alignment with supervisory expectations.
Further, the board of directors of a financial institution has to establish the framework and approve the risk appetite statement -- which has to be developed in collaboration with the CEO, CFO and Chief Risk Officer.
"The strength of the relationships between the board, CEO, CRO, CFO, business lines and internal audit plays an instrumental role in the RAF's effectiveness," it said.
Noting that distinct mandates and responsibilities for each of these levels of governance are essential, the FSB has said that "oversight and control functions (usually performed by the CEO, CRO, CFO, business line leaders, and internal audit) should always play a key role".
Going by the FSB principles, a board also needs to satisfy itself that the risk limits in the risk appetite statement are reflected appropriately in strategic business plans.
As per FSB, supervisors should have regular discussions with financial institutions regarding any changes to its RAF, breaches in risk limits and significant deviations from the approved risk appetite statement, among others.
The issue of excessive risk taking by big financial institutions gained attention in the wake of 2008 financial meltdown and since then G-20 leaders as well as individual countries have been working on ways to curb such trends.
