You are currently browsing the tag archive for the ‘risk appetite’ tag.

In the context of retail applicants, application scorecards etc., is there a well defined meaning for “risk appetite”?

My feeling is that it could be referring to either the marginal or the average situation, depending which hat is worn.

The risk management function acts as the gatekeeper, drawing the line on acceptable levels of risk – risk appetite – by setting cut-offs. This is wearing a marginal hat: the cutoff is the margin. For standard retail products it may conveniently be set in terms of PD, although more completely it would be an expected loss calculation. To caricature this risk manager, he doesn’t mind how profitable the applicants are, as long as they are just above the cut-off.

OTOH the business will be looking at the overall profitability of the product/campaign/portfolio whatever. The business manager is more likely to phrase his risk appetite targets in terms of average PD. To caricature the business manager, he doesn’t mind if a number of poor decisions are made around the margins as long as the venture as a whole makes a good return.

So is the setting of risk appetite about trying to decline applicants below a certain marginal PD, or is it about trying to achieve a certain average PD for the accepts? 

Complicating the discussion is the role played by volume. Higher cut-offs naturally mean lower volumes of successful applicants and this frustrates the assumptions on the business case.


Google Advertisement

We get older

Some Rights Reserved


Get every new post delivered to your Inbox.

Join 388 other followers