Managing Banking Risk with the Risk Appetite Framework: a Quantitative Model for the Italian Banking System

Cinzia Baldan (), Enrico Geretto and Francesco Zen

MPRA Paper from University Library of Munich, Germany

Abstract: We analyse the structural aspects of the banking Risk Appetite Framework (RAF), providing an operational application in the light of the detailed recommendations of the banking supervisors. We develop a quantitative approach that could be used to adapt to the requirements of these regulations and that might be useful for management purposes. This approach is empirically applied to the balance sheets of the Italian banking system. Our findings show that the Italian banks are generally underexposed in terms of credit risk and market risk, so there is room for shifting the risk profiles towards higher thresholds with a view to improving the credit institutions’ profitability while keeping their RAF consistent with the regulatory bodies’ requirements. The quantitative model can be applied effectively to all banks, for different types of risk, making the necessary adjustments according to the particular features of the profile being examined.

Keywords: Banks; Risk Appetite Framework; Risk Management (search for similar items in EconPapers)
JEL-codes: C43 G20 G21 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban and nep-rmg
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