Risk appetite and tolerance in Advanced Risk
You can define a risk appetite and tolerance within your organization by using the Advanced Risk application. A risk appetite and tolerance enable your organization to define the boundaries for acceptable and unacceptable risks.
Overview of a risk appetite
A risk appetite is the amount of risk that an organization is willing to take to achieve its strategic objectives.
A risk appetite can be defined in qualitative (numerical scale and ratings) and quantitative (absolute dollar) terms. For example, let's say that a lending institution provides a loan to some small scale industries. The lending institution has defined 5 percent as their target non-performing asset (NPA) for the current fiscal year.
Note: A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue.
Therefore, the risk appetite of the institution is 5 percent.
Benefits of using a risk appetite
The benefits of having a risk appetite for your organization are as follows:
- Provide better guidance to your first line of employees to implement risk management in specific areas of your business.
- Take risks within your organizational expectations and define and manage actions when there’s a breach.
- Assess the risk status that is based on the defined risk appetite and prioritize the risks that require attention.
- Assess all possible risks and define the boundaries for acceptable and unacceptable risks.
- Monitor your risk exposure and ensure that it’s consistent with your risk appetite. You can also track any unacceptable risks.
- Initiate a risk mitigation plan based on the risk appetite status.
Overview of risk tolerances
A risk tolerance is the standard deviation from the defined risk appetite that an organization can withstand without risking the organization's objectives and goals.
Setting up a risk appetite and tolerance
A risk administrator can configure and set up a risk appetite for your organization in the Advanced Risk application. For more information, see Risk appetite setup.
Parent Topic:Advanced Risk Assessment