Risk appetite is an articulation and allocation of the risk capacity or quantum of risk firm is willing to accept in pursuit of its strategy, duly set and monitored by groups of bodies. Risk appetite reflects a company’s capacity to sustain potential losses arising from a range of potential outcomes under different stress scenarios.
A firm defines its risk appetite in terms of both volatility of earnings and the maintenance of minimum regulatory capital requirements under stress scenarios. Risk appetite can be express in terms of how much variability of return a bank is, prepared to accept in order to achieve a desired level of result. It is determined by considering the relationship between risk and return.
We measure and express risk appetite qualitatively and in terms of quantitative risk metrics. The quantitative metrics include earnings at risk (or earnings volatility) and , related to this, the chance of regulatory insolvency, chance of experiencing a loss and economic capital adequacy.
