From Risk Capacity to Risk Appetite

Risk Capacity is the maximum amount of risk that an organisation is technically able to assume before breaching constraints determined by capital, liquidity, borrowing capacity, regulations, reputation and operational environment (As defined by FSB and CBI). Before you can confidently set your Risk Appetite you must establish the limits of your capacity.

Not all of what defines Capacity is measurable in defined units. Your reputation and your operational environment play a significant role in determining what is acceptable. If you have a reputation for honesty and integrity and good product design, your customers and prospects will be more likely to believe you and run with you when you next launch a product or service, even in an area you were not traditionally in. So, you can take more risk in new territory!

What about your “Operational Environment”? How capable are you at managing risk on a day-to-day basis? Do you have a risk-aware culture? Do you assess risk? Do you have the skills and knowledge to apply effective controls and maintain oversight to ensure they remain effective?

Your Risk Management Capability will ultimately determine how much risk you can take. Understand this and you will know your Risk Capacity. Know this and you can confidently set your Risk Appetite.