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IIF Releases Report on Governance for Strengthened Risk Management

Tokyo, Japan, October 13, 2012 — At its Annual Membership Meeting in Tokyo, the Institute of International Finance published a new study on industry sound practices in risk management, entitled the Report on Governance for Strengthened Risk Management.

The Report identifies key areas on which firms should focus when strengthening their risk management capabilities and governance. It suggests that financial institutions should develop and maintain a risk culture that aligns behavior and compensation policies with their own attitude to risk taking and risk management. It argues that the idea that ‘risk is everyone’s business’ needs to be ingrained in the day-to-day operations of the institution, through the development of a robust risk appetite framework that effectively cascades down through the organization, informing how all business units operate and make decisions. The report underscores that the foundation of strong risk governance is based on the premise that ownership of risk resides with the business units within each organization, and that robust oversight is a duty that the Board of Directors should effectively undertake.

Introducing the report at today’s press conference in Tokyo, Mr. Rick Waugh, Vice Chairman of the IIF Board of Directors and Chairman of the IIF Committee on Governance and Industry Practices, commented: “While everyone recognizes that risk management and risk governance have to be top priorities, emphasis should be put on embedding recommended sound practices inside financial firms. Good risk management does not mean being entirely risk-averse; that way lies stagnation. I am confident that eventually, thanks to work being done in this area by the IIF, we will get the balance right.”

This new study builds on an earlier IIF analysis, the Final Report of the Committee on Markets Best Practices: Principles of Conduct and Best Practice Recommendations, published in 2008. That report identified a number of weaknesses in governance and risk management practices, drew lessons from these weaknesses, and developed industry practices to help address them. The new report analyzes the main challenges that financial firms are facing when implementing strengthened practices, and provides practical, real life examples of how different firms have successfully overcome those challenges and implemented improved practices.

Mr. Koos Timmermans, Chairman of the IIF Task Force on Risk Governance, said at today’s press conference: “While there is universal agreement in our industry concerning the need to build a strong risk culture, the importance of developing a robust risk appetite framework, of raising the profile of the Chief Risk Officer, and of generally increasing senior management, Board and Board Risk Committee’s roles in risk matters, firms have different approaches as to how to implement these challenges in practice. As a central tenet, this Report suggests that financial institutions should develop and maintain a risk culture that aligns behavior and compensation policies with their own attitude to risk taking and risk management. There are challenges when attempting to revamp the overall risk framework of an organization, but they can be effectively overcome.”

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