Risk appetite and risk management: some insights on credit risk

What it is about

Mario Zambrano explained at the Second Annual Risk Conference (September 27, 2024) how risk appetite and corporate governance connect with credit risk management, with a tour of good and bad practices observed from the supervisory side.

The 40 slides start from the economic situation and capacity to pay, review good corporate governance practices, define risk appetite, tolerance and capacity with practical applications, and detail the credit origination and monitoring process, the most frequent bad practices (in origination, monitoring, accounting and systems) and the final comments.

Objectives

• Relate corporate governance, risk appetite and credit risk management.
• Show with practical examples how risk appetite, tolerance and capacity are set.
• Identify the most common bad practices in credit origination and monitoring.

Key takeaways

1. Good corporate governance requires that the board have a majority of independent members, that its chair be independent of executive management and that the audit committee be made up solely of independent directors.
2. The board sets the risk appetite framework and approves the appetite statement, in collaboration with senior management; appetite, tolerance and capacity are distinct levels of the same risk.
3. Managing risk is much more than passing the annual stress test (ICAAP/ILAAP): it is work that extends throughout the year.
4. Bad origination practices cited include not defining installment-to-income thresholds by loan type, poorly determining the loan purpose and the risk unit's opinion not being decisive.
5. Also noted are very long terms to lower the installment, classifying the borrower only by days past due, hiding the true classification through reschedulings and systems without data validations.