Formally defined in the risk management standards.
2018
ISO 31000
Places appetite and tolerance in the context-setting stage — before risks are identified.
2017 revision
COSO ERM
Treats appetite and tolerance as the fulcrum between strategy and performance.
Risk Appetite
Direction.
How much, and of what kind.
Qualitative · a plain-language statement of stance
"We will maintain a conservative liquidity profile."
"We accept measured credit risk in support of relationship banking."
"We have no appetite for breaches of regulatory conduct standards."
Risk Tolerance
Lines.
The numeric limits you will not cross.
Quantitative · specific thresholds, specific limits
Duration limits on held-to-maturity securities
Counterparty concentration caps
Capital ratio floors
Appetite without tolerance is a slogan. Tolerance without appetite is a ceiling no one understands.
Appetite
adjusts as strategy shifts
⇄
Tolerance
adjusts as the risk environment moves
Case · Silicon Valley Bank
Thursday · March 9, 2023 · close of business · New York
Silicon Valley Bank announced a loss, and a raise.
$1.8bn
Loss on bond portfolio sale
$2.25bn
Planned equity raise
Friday · March 10, 2023 · the run
$42bn
out the door in a single morning · about a quarter of deposits
ThursdaySolvent
Friday AMRun begins
Friday PMFDIC receivership
≈ 26 hoursFastest bank run in modern history
SVB's qualitative appetite statement
stable deposits
low duration risk
a match-funded balance sheet
On paper, a conservative institution.
Held-to-maturity portfolio
Rates near zero. Only way to produce yield: extend duration.
Long-dated US Treasuries. Agency mortgage-backed securities. Inside the Asset-Liability Committee — consistent with a yield-chasing appetite, not the stated one.
1y
3y
5y
7y
10y+
MBS
The appetite statement said match-funded. The balance sheet was not.
+500 bps
Federal Reserve · 2022 · largest rate move in forty years
The market value of the bonds collapsed. The deposit base — venture-backed tech, burning cash faster than modelled — drew down far faster than any model had assumed.
The tolerance limits were there. They were never re-cut.
Qualitative appetite
"match-funded"
≠
Quantitative tolerance
limits unchanged as rates climbed 500bps
Culture, not technique
8 months
Chief Risk Officer seat · empty · April 2022 – January 2023
Board risk committee
4 meetings in 2021 → 7 in 2022 — reacting to a risk the appetite statement said could not happen.
CEO pay · Greg Becker
Rewarded on net interest income and asset growth. Metrics that positively rewarded extending duration.
Fed Post-Mortem · April 2023
The Barr Report · named the bank. Also named itself.
"Our regulatory standards for SVB were too low. Our supervision of SVB did not work with sufficient force and urgency."
Michael Barr · Vice Chair for Supervision · Federal Reserve
31
unresolved findings
3×
peer average
2019
prudential tailoring · EGRRCPA
The habit
Review appetite and tolerance together. Ask one question.
Has the world changed in ways that mean our quantitative limits no longer support our qualitative stance?
Three things to carry forward.
A reading
The Federal Reserve's Review of the Supervision and Regulation of Silicon Valley Bank, April 2023 — the Barr Report. Pair it with the FDIC's same-day failure review.
A question
When did your qualitative appetite statement last get tested against your quantitative tolerance limits?
The wider library
Appetite — the direction. Tolerance — the lines. Three Lines — who enforces them. Board oversight — who believes they matter.
Risk Room 02 · The Governance Library curated by Matthew Doyle · mæd partners