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

Author

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  • Baldan, Cinzia
  • Geretto, Enrico
  • Zen, Francesco

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.

Suggested Citation

  • Baldan, Cinzia & Geretto, Enrico & Zen, Francesco, 2014. "Managing Banking Risk with the Risk Appetite Framework: a Quantitative Model for the Italian Banking System," MPRA Paper 59504, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59504
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    File URL: https://mpra.ub.uni-muenchen.de/59504/1/MPRA_paper_59504.pdf
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    Keywords

    Banks; Risk Appetite Framework; Risk Management;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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