Why understanding your risk appetite is critical

Clayton J. Mitchell, Gayle Woodbury
Why understanding your risk appetite is critical

Financial services organizations can miss business opportunities when they’re not willing to take on risk. But those that take on too much risk aren’t always able to realize sustainable success.

Striking a balance between seizing opportunities and managing risk can help inform strategy across the organization. A holistic understanding of the current and potential risks an organization faces – and what the risk appetite is – are critical components of an aligned strategy.

Risk can be your gateway to better business, big and small.

Risk can be your gateway to better business, big and small.

The common ground that risk management and innovation share allows organizations to rely on minimum acceptable maturity. With this approach, the first and second lines of defense work together to determine how mature a risk application needs to be to address both internal and external influences.

This interplay allows businesses to incrementally create and expand lines of business with risk measurements to match. Minimum acceptable maturity helps keep initiatives in line with regulations and risk appetites while still moving the business forward.

The success of minimum acceptable maturity comes from maintaining the balance not on a scheduled basis but rather as events happen and internal and external factors change. Financial services organizations that rely on stagnant risk monitoring often aren’t staying as safe as they think. Risk exposure is constantly changing, and true safety comes from understanding risk and using it to move business forward.

Improving your monitoring can make risk work for you.

Improving your monitoring can make risk work for you.

Risk management across an organization is a complex network of ever-changing metrics. Fluid, ongoing measurements are necessary to establish an accurate measure of risk and how changes could affect an organization.

Developing a more complete view of risk and defining the organization’s risk appetite are more than routine exercises. Instead, a true inquiry into what the organization can and wants to take on can drive value and help maintain profitability. An effective risk appetite depends on if a financial services organization:

  • Knows how much risk is present
  • Has established its risk tolerance
  • Works with up-to-date measurements
  • Trusts the data and inputs used
  • Understands how decisions can affect important metrics

Regularly informed business decisions can help deliver results.

Regularly informed business decisions can help deliver results.

A dynamic, data-driven approach that relies on up-to-date information for decision-making can, in turn, inform where to expand the risk appetite in the face of change. Managing a risk management program isn’t about spending less on risk and compliance, earmarking an annual amount to preserve budgets, or prescribing objective increases.

Businesses should constantly ask themselves how new initiatives or decisions can increase revenue or margin so resources can be applied strategically. Sharing accurate information with the business line allows the first line to ask questions such as:

  • How important is this business asset?
  • How will our decision affect how regulations apply?
  • What will be our new financial risk exposure?

With those questions addressed, the business line can make informed decisions about its strategy moving forward. That information can then outline where risk management maturity needs to scale.

Staying current on internal and external factors helps paint a clearer picture.

Internal and external factors can affect risk levels from one moment to the next. Information about such factors informs the whole picture and can help an organization make accurate, data-driven decisions.

Only when an organization understands the potential effects of both sets of factors can it decide how to balance opportunity with risk management.

Understand your risk appetite.

Financial services organizations that seek up-to-date information to make decisions are on the right track, but how can they effectively gather data? First and foremost, they must know what their risk appetites are and what factors could move the needle.

Download our guide to understand how to identify triggers, measure data, and apply insights for better business decisions.

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Crowe can help you use risk and compliance to support your goals.

We understand what organizations need to do business and where they can innovate. We can help you develop confidence in your risk management so your teams can focus on moving forward.
Clayton J. Mitchell
Clayton J. Mitchell
Managing Principal, Fintech
Gayle Woodbury
Gayle Woodbury
Principal, Financial Services Consulting