The Broad Concepts
Your risk appetite encompasses the following broad concepts:
◆ The overarching statement of risk appetite.As a company, how hungry are you for risk?
◆ How much risk you expect to carry.What is the right amount of risk? Try to answer these questions in quantitative, numerical terms.
◆ Your risk versus return profile.What return will you seek for your risk? What mix of risk and return will you see across your products and services?
◆ Your threshold for risk.How will you control your threshold so you can manage within the company’s set risk appetite?
Best Bets
If the company has a management team and a board of some sort, then it’s incredibly useful to make the articulation of risk appetite a more formal process or at least a focused discussion (perhaps a whole day or a dedicated session) with one or both of these teams.
By addressing these key ideas, you can build a risk appetite statement that communicates your view on risk-taking and helps you manage to that view throughout the year. The most important thing is to arrive at statements, thresholds, and numbers that feel right. Your risk appetite must align with the persona of the company. This includes corporate values and operating style and behavior. Align it to the company’s values and the people driving those values.
Ultimately, your risk appetite statement drives the message to the rest of the organization. Make it reflect the way you want to operate your business. If it doesn’t feel right, it probably isn’t.
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