Get a plain-English read of Risk appetite

Turn the raw legal text into a practical explanation grounded in Banking, Insurance, Life Insurance and Health Insurance (prudential standard) determination No.1 of 2019.

Risk appetite

An APRA-regulated institution must maintain an appropriate, clear and concise risk appetite statement for the institution that addresses the institution’s material risks. The Board is responsible for setting the risk appetite of the institution and must approve the institution’s risk appetite statement.
The risk appetite statement must, at a minimum, convey:

(a) the degree of risk that the institution is prepared to accept in pursuit of its strategic objectives and business plan, giving consideration to the interests of depositors and/or policyholders (risk appetite);

(b) for each material risk, the maximum level of risk that the institution is willing to operate within, expressed as a risk limit and based on its risk appetite, risk profile and capital strength (risk tolerance);

(c) the process for ensuring that risk tolerances are set at an appropriate level, based on an estimate of the impact in the event that a risk tolerance is breached, and the likelihood that each material risk is realised;

(d) the process for monitoring compliance with each risk tolerance and for taking appropriate action in the event that it is breached; and

(e) the timing and process for review of the risk appetite and risk tolerances.