Risk Appetite Framework: Important Differences for Board Members

Risk capacity is the amount set by the board of directors of an organization, which indicates the total risk an organization can accept while pursuing strategic objectives. Risk appetite is the amount of risk an organization is willing to accept. Setting out this amount is more critical than setting the risk capacity. Risk tolerance is the amount of risk the board of directors is willing to accept as variations from the risk appetite. Risk Target refers to the amount of risk looked at while assessing performance/ rewards/ return. The optimum amount of return is put into scale against this amount of risk to assess the risk/ reward from a business venture. It could be less or equal to the risk appetite.