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Risk Appetite

Risk appetite refers to the level (and types) of risk that a firm is willing to retain.

What is Risk Appetite?

Risk appetite refers to the risk level (and types) that a firm is willing to retain.
There are two very important subcomponents:

  • risk willingness
  • risk ability

Risk willingness relates to a firm’s desire to accept risk to pursue its business goals, while risk ability can cap risk willingness.

Example of Risk Appetite

If a firm has a total risk capacity of \$200 million and senior management has set a risk appetite at a lesser amount (e.g., \$170 million), managers should leave a margin for error and accept some risk level that is marginally below that amount (e.g., perhaps a cap of $150 million of exposure in this example).

Why is it essential to know Risk Appetite?

The first step of risk management in any organisation is to set the bank’s risk appetite. No risk management strategy can work well without setting a natural risk appetite.

Owais Siddiqui
1 min read
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