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Managing Risk in Cards Portfolios: Risk Appetite and Limits

Author

Listed:
  • Tiffany Eder
  • Claire Labonne
  • Caitlin O'Loughlin
  • Krish Sharma

Abstract

We describe an important risk management tool at financial institutions, risk appetite frameworks. We observe those frameworks for credit cards portfolios at four large banks and analyze when and why banks adjust them. The risk appetite frameworks for these banks monitor 40 to 150 metrics. We focus on metrics related to outstanding balances of which we identified 79. Overall, we find that these frameworks are sticky. Most adjustments occur during scheduled annual reviews and are relatively limited. Limit breaches are rare. Thresholds are often changed the month after a breach or after the utilization rate crossed 90 percent, but most breaches imply risk mitigating measures such as tightening credit standards. Notably, managers’ reactions were even stickier in the pandemic period.

Suggested Citation

  • Tiffany Eder & Claire Labonne & Caitlin O'Loughlin & Krish Sharma, 2024. "Managing Risk in Cards Portfolios: Risk Appetite and Limits," Supervisory Research and Analysis Working Papers 24-01, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbqu:97930
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    File URL: https://www.bostonfed.org/publications/risk-and-policy-analysis/2024/managing-risk-in-cards-portfolios-risk-appetite-and-limits
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    References listed on IDEAS

    as
    1. Walter Gontarek & Ruth Bender, 2019. "Examining risk governance practices in global financial institutions: the adoption of risk appetite statements," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 74-85, March.
    2. Baldan, Cinzia & Geretto, Enrico & Zen, Francesco, 2016. "A quantitative model to articulate the banking risk appetite framework," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 9(2), pages 175-196, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banking supervision; risk management; risk limits; risk appetite framework; credit cards;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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