Research On Establishing The Risk Appetite Framework For China’s Commercial Banks

The risk appetite of commercial banks is the type and amount of risk that a bank is willing to take in order to achieve its goal of continuing operation and getting profits. After the2008financial crisis, risk appetite, as an important risk management tool of commercial banks, has got extensive concerns from the international banking industry. A good risk appetite framework can not only appropriately reflect a bank’s overall development strategy, but can also provide the risk management basis for senior management of commercial banks. Specifically, it helps a commercial bank successfully shift its business model from passively preventing risk to actively managing risk. In addition, with the implementation of Basel III, the regulatory environment for international banking industry has become more severe, which further narrows the profit margins of commercial banks. Thus, establishing a good risk appetite framework is of great significance for a commercial bank to achieve its business target of maximizing shareholders’rate of returns under controllable risks.This paper starts with the definition and explanation of risk appetite and its relevant concepts, then analyzes the great significance of risk appetite to the continuing operation and scientific development of commercial banks in detail. On the basis of the above analysis, the paper also provides the principles and method of setting risk appetite framework. Besides, the paper gives an overview of many leading international banks’practices in the establishment and implementation of risk appetite framework, including their common points and common challenges in establishing and implementing their risk appetite framework. The paper also summarizes the excellent practices and experiences of these leading international banks in meeting these challenges. In addition to that, the paper also introduces the Royal Bank of Canada’s and the National Australia Bank’s risk appetite framework as a case study, with the purpose of providing some role models for China’s commercial banks in the establishment of risk appetite framework. At last, the paper expresses some specific requirements for the managers at all levels of China’s commercial banks, and then points out the main development direction of China’s commercial banks in the establishment of risk appetite framework.