How can risk appetite statements improve your risk reporting?

1 What are risk appetite statements?

Risk appetite statements are written declarations that define the types and levels of risk that you are comfortable with taking in different areas of your business, such as market, credit, operational, liquidity, and reputational risk. They are based on your risk capacity, which is the maximum amount of risk that you can bear without jeopardizing your solvency, liquidity, or reputation, and your risk strategy, which is the optimal balance of risk and reward that you aim to achieve. Risk appetite statements are usually accompanied by risk limits, which are quantitative or qualitative thresholds that indicate when the actual or potential risk exposure exceeds the desired level.

2 How to create risk appetite statements?

Creating risk appetite statements is a process that must be tailored to the specific context, objectives, and culture of an organization. Generally, this should involve the relevant stakeholders such as board members, senior management, business units, and risk functions in defining and approving the statements. Additionally, the risk appetite statements should be aligned with the organization's vision, mission, values, strategic plan, and regulatory and market expectations. Clear and simple language should be used to make sure that the statements are understandable and actionable for all audiences. It is also important to cover the key risk categories and subcategories that are relevant for the business, as well as use appropriate metrics and indicators to measure and monitor them. Lastly, specify the time horizon, frequency, and format of the risk appetite statements review and update to ensure they reflect any changes in the internal and external environment.

3 How can risk appetite statements improve your risk reporting?

Using risk appetite statements can improve your risk reporting in several ways, such as providing a common framework and language for communicating risk, enhancing transparency and accountability of risk-taking decisions, and supporting the alignment of risk management with strategic planning. Additionally, they can encourage a proactive approach to risk management, rather than a reactive one, and promote a risk-aware and risk-cultured mindset among all employees and stakeholders. Risk reporting is not only a compliance requirement, but also a strategic tool for creating and preserving value in the financial sector. By using risk appetite statements, you can improve the clarity, consistency, and relevance of your risk reporting to reflect your risk preferences and priorities.

4 Here’s what else to consider

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