DRAFT — structure and argument are ours, but this is published under a byline and should not go live until the named author has read and approved it.
A useful test for a risk appetite statement: name a decision in the last two years that it prevented. If nobody can, the document is a description rather than a constraint.
Why this happens
Appetite statements are usually written after the fact, calibrated to the portfolio the firm already holds. Thresholds are set where current exposure sits, with enough headroom to avoid triggering a breach in the ordinary course. The result reads as governance and functions as commentary.
What a constraining statement looks like
- Thresholds set from capacity, not current position. The question is what
the balance sheet and capital base can absorb, not where the portfolio happens to sit today.
- Consequences that are pre-agreed. A limit with no defined response is a
reporting line. What stops, who decides, and by when should be settled before the breach, not during it.
- Written where the decisions are made. Appetite expressed only at portfolio
level does not reach the person approving an individual exposure.
- Reviewed when strategy changes, not annually. A statement that survives a
material shift in strategy untouched was probably not binding on it.
The board's question
The most productive question a director can ask is not whether the firm is within appetite. It is: what have we declined to do because of this document? A board that never hears an answer is not being governed by the statement it approved.