Every business has an idea about the level of risk it can withstand. Banks and other businesses operating in the financial sector are very particular about their risk appetite. Their risk appetites are decided based on in-depth analytics. The risk appetite is then broken down into risk metrics and levels. This enables banks and financial institutions to accurately track their current risks and ensure that the current risk levels are acceptable for the chosen risk appetite. Periodically tracking risk levels and comparing them with the risk appetite is useful but tracking the risk appetite in real-time can be profoundly beneficial for an organization.

The Challenges of Managing Risk Appetite

Most businesses have a good understanding of their risk appetite. The problem is that knowing the risk appetite is just the start – a business needs to able to ensure that it stays within the limits prescribed by the risk appetite. There are two major obstacles which businesses face when it comes to developing a risk appetite framework that adequately protects the business:

Risk Appetite Vs Risk Tolerance

There is some confusion abound when it comes to the terms risk appetite and risk tolerance. Risk appetite is defined as the amount of risk an organization finds acceptable. This sounds like it is defining the risk a business can ‘’tolerate’’ but that is not the case. Risk appetite is not about what an organization can survive – risk appetite defines the acceptable amounts of risk which the business expects.

There is no similar definition for risk tolerance. Some businesses use it to mean the same thing as risk appetite, some define risk tolerance as the amount of risk a business can withstand in the worst circumstances.

Lack of Risk Metrics in Risk Appetite

A business knows its risk appetite and it also knows risk drivers – the processes that increase or decrease risk. The problem is that it is almost impossible to connect the two without a proper risk appetite framework in place. Looking at the current risk can only help businesses ensure that they are currently under their operational risk appetite targets. It does not shed light on whether the business is moving towards a more dangerous position, because the risk drivers – the processes, tasks, and employees – are not being tracked.

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Periodic Reporting

The second major obstacle that businesses must deal with is that the reporting is periodic. A business may look at its risk appetite statement every month or even every quarter. This means that it is possible that a business may reach dangerous risk levels that go beyond the accepted risk appetite but will only find out once the risk appetite statement is delivered to management at the end of the month or the end of the quarter. This can create a crisis for the organization – requiring them to disrupt their current operations so there can be an audit to discover what is increasing risk levels and how they can be brought back to acceptable risk levels.

Risk Appetite Report

A risk appetite report is a very useful tool for financial institutions. It is a report that shows everyone the current risk levels and the accepted risk appetite of the organization. If the current risk levels are lower than the accepted risk appetite it is a sign that the business can take a few more risks and avail more growth opportunities. Higher risk levels mean that the business needs to be cautious.

How Risk Technology Helps Risk Appetite

Risk technology can enable real-time tracking of risk metrics and the risk appetite, which has a profound effect on how risks are perceived and mitigated within an organization.

Risk management technology also solves the problem of there only being periodic risk assessments. Since all risk metrics are being tracked in real time, enterprise risk levels can also be assessed in real time. Share on X

Real-Time Metrics

Risk management platforms track the risks across the organization in real-time. This means that the previous obstacle of not having the metrics is no longer a problem for businesses. Managers can assign risk metrics to different enterprise risks for a complete picture of not just the current risk levels, but also trends and predictions about how the risk metrics will evolve over time. Such insights help a business keep track of not just risk levels but also all the risk drivers in the organization. A business can then create a detailed risk appetite statement broken down into many different risks, each with its own metrics.

Real-Time Tracking of Risk Appetite

Risk management technology also solves the problem of there only being periodic risk assessments. Since all risk metrics are being tracked in real time, enterprise risk levels can also be assessed in real time. This means that management has access to a risk appetite statement that tells them about how close the business is to the risk appetite. Instead of dealing with a risk issue that has been causing problems the whole month and was only revealed when a report was presented at the end of the month, businesses can deal with new risk related issues immediately. This minimizes the damage caused by the risk and also makes it easier for the business to mitigate the risk quickly.

Proactive Risk Management

Real-time risk appetite statements enable a business to proactively mitigate risks. Most businesses have to make a difficult choice – do they take on more risk so they can make more profits, or do they keep risks at a minimum but miss the opportunity for growth? Real-time risk appetite allows a business to expand while also increasing the protection the business has against risks. Having access to real-time risk metrics means that the business can quickly change directions. Businesses become more agile and can easily navigate the many risks that are present in the environment.

Better risk intelligence, of which risk appetite is an essential part, helps businesses grow according to their strategic plans by ensuring that all known risks are mitigated. Any sudden changes in risk metrics is instantly highlighted by the risk management platform.

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Uncovering Opportunities

Real-time risk tracking helps banks understand how risks are evolving in the market. This highlights the threats and the opportunities available, because banks can also see which areas are showing the most promising developments. Businesses that are tracking real-time risk metrics can discover these opportunities before their competition that is relying on external sources of intelligence alone. Looking at the dynamic risk appetite statement quickly shows management that there are new opportunities where the bank can afford to take more risks for a higher reward.

Interested in seeing how a dynamic risk appetite statement will work for your organization? Get in touch with our risk experts for a demonstration of our enterprise risk management application.