The Risk Appetite Dilemma

In financial markets rife with uncertainty and volatility, figuring out how to create and properly use a risk appetite statement (RAS) is a daunting task. The traditional process for addressing this challenge is outdated and flawed. So, how can an organization enliven its risk appetite statement, to help foster a firmwide culture of risk awareness and to improve risk-adjusted return?

Setting enterprise-wide risk appetite is a necessary step that enables a board to identify a firm’s key risks – and to set limits for those threats. However, to be effective, risk appetite statements must be developed in ways that are directly actionable for business and risk teams.

We’ll get to best practices for risk appetite statements in a minute, but we first need to understand their current drawbacks.

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