Financial services firms are in the business of taking risks. Although these risks are mainly financial, there are others too, ranging from day-to-day operations, to the companies’ broader strategic moves into new markets or new products. As such, every organization has a risk appetite, whether articulated or not.
Regulators providing oversight to the financial services industry now want firms to define their risk appetite in a written statement, approved by the board of directors. This has proven difficult for many financial services firms. One reason may be that many companies tend to think of risk appetite as a one-time determination, and so have a hard time defining what that is in light of a constantly changing risk landscape. Instead, risk appetite is better viewed as an ongoing, dynamic conversation between the board of directors, management and the operational units in the organization.