The European Central Bank (ECB) has published a supervisory statement on governance and risk appetite under the single supervisory mechanism (SSM). The statement reports on the lessons learned from a thematic review conducted in 2015 that involved an in-depth assessment of the management bodies and risk appetite framework’s (RAFs) of all significant institutions (SIs) in the euro area. The supervisory statement describes good practices observed across SIs, sets out supervisory expectations regarding a bank’s board and RAF and aims to support and guide institutions towards the implementation of international best practice.
The supervisory statement notes in particular that:
- the SSM has high and specific expectations regarding banks’ boards. Boards should challenge, approve and oversee the management’s implementation of the bank’s strategic objectives, governance and corporate culture;
- the SSM expects the board to demonstrate its capacity for independent challenge and oversight of senior management. This implies that an institution’s board should have an adequate composition and effective organisation in order to ensure that it has the capacity to challenge senior management;
- the board should include a risk perspective on strategic discussions and demonstrate effective oversight of risk and control functions. In particular, the board should be strongly involved in the validation process and monitoring of the RAF;
- banks are expected to develop and establish a comprehensive RAF, which should help them strengthen risk awareness and promote an adequate risk culture;
- as a prerequisite for sound risk management, the RAF should define the level of risk tolerance that the institution is will to take in relation to both financial and non-financial risks;
- risk metrics and limits should be deployed consistently within entities and business lines, and be monitored and reported to the board regularly; and
- the RAF should remain aligned with the business plan, strategy development, capital and liquidity planning, and remuneration schemes of financial institutions.
View ECB SSM supervisory statement on governance and risk appetite, 21 June 2016