When the board of directors decides strategy, it decides at the same time which risks to take and how far. Risk appetite shows how far the institution tolerates risks such as interest rates, foreign exchange, equity prices and complex structured products1.
In an example in the Bank of Japan document, a financial institution before the introduction of the negative interest rate policy takes interest rate risk, mainly in government bonds, to earn period profit. It limits the valuation losses that a rise in rates could cause to within three years of period profit, and it makes no investments whose risks are unclear2.
Risk appetite is different from risk capacity (the maximum level of risk a financial institution can take without breaching its regulatory capital or liquidity constraints). Risk appetite is set within risk capacity3. The Financial Stability Board (FSB) principles say risk appetite should be expressed through both numerical measures and qualitative statements3. The supervisory guidelines use the term "リスク選好度（リスクアペタイト）" (risk preference, or risk appetite)4.
Notes
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Bank of Japan Financial System and Bank Examination Department, Center for Advanced Financial Technology, "市場リスク管理態勢の整備" (Building a market risk management framework) (September 2019, in Japanese), "戦略、リスクアペタイト、リスク管理方針の決定" (Determining strategy, risk appetite and risk management policy) (page 8). ↩
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Bank of Japan Financial System and Bank Examination Department, Center for Advanced Financial Technology, "市場リスク管理態勢の整備" (September 2019, in Japanese), "（例）市場リスクのアペタイト ― マイナス金利政策導入前" ((Example) Market risk appetite before the introduction of the negative interest rate policy) (page 9). ↩
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FSB, "Principles for An Effective Risk Appetite Framework" (November 18, 2013), the definitions table at the start (pages 2–3): "Risk appetite statement," "Risk capacity" and "Risk appetite." ↩ ↩2
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Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026, in Japanese), III-3-6-2 (2) (page 260). ↩