Clear understanding of capacity

The organisation has a clear understanding of its capacity and appetite to bear risk.

Having a full understanding of risk capacity and risk appetite typically includes:

  • Capacity to bear risk being a function of an organisation’s financial strength and risk management capability, (ie what capital is available and its ability to raise further capital, and the strength of operational processes, organisational structure, human capital / competencies, system and processing resources and the operating culture).
  • A clear articulation of the willingness to take on risk (ie risk appetite) given its ability to take on risk (ie risk capacity).
  • Clearly defined, prudent policies and statements of risk appetite and risk limits in place to manage an organisation’s significant risks from all sources.

Statements about risk capacity, appetite and limits would typically:

  • Address each category of risk (eg operational risk).
  • Clearly express the levels and types of acceptable and / or unacceptable risk taking as defined by the Board or senior management.
  • Be expressed through risk limits, thresholds, indicators and / or qualitative statements which are relevant and understandable for the business.
  • Be clearly communicated to managers and staff at all levels and cascaded throughout the organisation.
  • Guide risk acceptance and decision-making throughout the organisation.
Last updated on 09 May 2007