RISK APPETITE ASSESSMENT FRAMEWORK

he adoption of any managerial decision within the company happens in the presence of risks. Against this background, it is vital to determine whether the risk is acceptable for achieving the objectives. In the article the essence of risk appetite, risk tolerance and risk capacity is considered. Differences between risk capacity, risk appetite and risk tolerance are defined. Risk appetite reflects the level of losses that the company is willing to accept in order to achieve its strategic objectives. In contrast, risk tolerance is related to the acceptance of the outcomes of specific identified risk events and is defined as readiness for certain risk event. Risk capacity is the maximum level of risk that an organization is able to accept for achieving its business goals, taking into account the current level of resources, its capital structure and access to markets. An important part of identifying the risk appetite for the company is a description of advantages and disadvantages of existing methods of its assessment. Quantitative and qualitative approaches to determining risk appetite are considered. In the first case, the absolute value of possible risk or its relative value is established. In this case, the risk appetite is determined depending on organizational objectives. These objectives may determine the achievement of the planned financial indicators, compliance with financial regulations and other indicators of the company. Qualitative assessment of risk appetite is used when the risk cannot be quantified. In this case, the risk appetite is presented in a descriptive way. It is important to define the risk appetite including all aspects of the enterprise activity in the context of certain strategic goals of its development. Breaching the risk tolerance threshold should serve as a red alert for management. In such a case, it is important to reduce the risk position.