Risk appetite, stress testing, and capital planning are inextricably linked because it is difficult to address any of the three concepts individually without addressing the others.
Risk appetite can be regarded as the most fundamental concept for the following reasons:
•It drives the other two:
o It is not as meaningful to analyze the implications of a stress test, or to plan how much capital the bank will require, without first reconciling risk-taking and business goals.
•It comes from the top:
o Risk appetite is a board-level initiative that permeates the entire organization.