Four Risk Appetite Statements

Another one of those Dan’s New Leaf Posts, meant to inspire thought about IT Governance . . . .

For all the same reasons a board of directors would want to establish a risk appetite statement on loan risk or other major risk categories, the 2015 Cybersecurity Assessment Tool gave us the ability to establish a statement based on perceived inherent risk of information assets, and the risk of not being at the “appropriate maturity” related to, at least, cybersecurity controls.  Most banks are now establishing board-approved statements that say something along the lines of:

• “When introducing new assets that represent a (usually moderate*) level of cybersecurity risk according to the FFIEC Cybersecurity Assessment Tool, management will inform the board prior to putting the asset in production.”

This allows management to freely bring in products and services that are not worth the board’s attention, but when one is, it provides a mechanism for ensuring the board, and not management, accepts the risk.

This “inherent cyber-risk appetite statement” is usually accompanied by:

• “Whenever the bank cannot declare itself at the (usually baseline) level of maturity,  the board will be notified in the next board meeting.”

But the cybersecurity assessment tool leaves room for improvement.  For one, it’s only about cybersecurity, and most community banks face far more information security risk than cybersecurity, buzzwords and hoopla aside.  But more importantly, it does not address a couple of risk appetite factors we believe would be easily addressed:

The board should decide where, on Everett Rodgers’ Diffusion Theory of Innovation curve, the bank should be.  In other words, do we want to be an innovator (first 10%), early adopter (second 15%), early majority adopter (second 25%), later majority adopter (third 25%, or laggard (final 25%).  (See chart).  The third statement could be written as,

• “In general, the board wants the bank to be an (usually early-adopter) of security-related technologies, but a late majority adopter of all other technologies.  Thus, the board will be notified anytime a new product, service, or technology is not perceived to fall into the above guideline.

A final, and well-loved statement if the board has the courage to make it, would be how to address low-risk non-technical audit findings.  Most banks do not have a well-designed approach to this.  It’s usually left up to the auditor.  It’s based on the notion that anybody can find at least a thousand non-technical issues . . . where we may not be TECHNICALLY dotting every regulatory ‘I,’ or crossing every FFIEC ‘t.’  Here’s my favorite example:  The OCC’s guidance on contract review requires the bank to have the right to audit its vendors.  How often do you see that?  (Never?)  If an auditor was to find this, it would surely be “low risk” for most banks.

So, maybe a statement like this may be a good addition to the bank’s risk appetite statement:

• “All audit findings will be risk-ranked.  Low risk non-technical IT audit findings should be documented in a Workpaper provided to management and the audit committee.  However, unless the auditor feels there is a need, low risk non-technical audit findings will not be tracked in the audit tracking program, and closure of these findings will be at the discretion of the Information Security Officer, based on a risk-reward calculation.”

Original article by Dan Hadaway CRISC CISA CISM. Founder and Managing Partner, infotex

“Dan’s New Leaf” is a “fun blog to inspire thought in the area of IT Governance.”

One Response to “Four Risk Appetite Statements”

Comment from Roger Chalkley
Time 06/10/2019 at 5:26 pm

Great ideas and suggestions to fully cover the bank on Risk Appetite!