Define risk appetite with its objectives. How is the risk management is related to risk appetite?

Risk Appetite is the amount and type of risk that a bank is willing to take to meet its strategic goals. It is the total risk that a bank can bear based on its risk profile.

Risk Appetite is generally expressed through quantitative and qualitative measures. It should consider extreme conditions, events, and outcomes.

Objectives of Risk Appetite

The main objectives of risk appetite are:

(1) Risk appetite helps ensure that the bank takes risks in an honest and responsible manner.

(2) It helps the bank to maintain its financial strength and ability to face future losses.

(3) It helps the bank to avoid excessive losses from the money deposited by the public.

(4) It ensures that the bank operates within legal and regulatory requirements.

(5) It helps the bank to maintain strong internal controls and continue its operations smoothly.

Relationship between Risk Appetite and Risk Response Strategy

(1) Risk appetite sets the boundary of risk that a bank is willing to accept. Risk response strategy explains what the bank should do when a risk is identified.

(2) If a risk is within the bank’s risk appetite, the bank may respond by accepting it. If it is above the appetite, the bank should respond by reducing or controlling it.

(3) The bank uses its risk response strategy to keep its actual risk within the level set by its risk appetite.