An effective risk appetite framework is the foundation of good risk management. A firm’s risk appetite represents the aggregate level and types of risk a firm is willing to assume within its risk capacity to achieve its strategic objectives and business plan, and this should be set out in written form in a risk appetite statement.. The firm’s risk appetite statement, in particular, should be linked to the firm’s short- and long-term strategic, capital and financial plans, as well as compensation programmes. It should assess the firm’s material risks under both normal and stressed market and macroeconomic conditions, and set clear boundaries and expectations by establishing quantitative limits and qualitative statements for risks that are difficult to measure. The Principles also aim to establish a common nomenclature for terms used in the risk appetite framework, which will help to facilitate a common understanding between supervisors and firms and to narrow any gaps between supervisory expectations and firms’ practices.

To help inform the final version of these Principles for an Effective Risk Appetite Framework, the FSB welcomes comments on the consultative document. Responses should be sent to fsb@bis.org by Monday 30 September 2013. Responses will be published on the FSB’s website unless respondents explicitly request otherwise.