Risk appetite (risk appetite framework) · Concepts

Roles that need it

Key risk indicator (KRI)A key risk indicator is a metric that signals rising exposure to a risk before losses occur, such as failed trades, system downtime or staff turnover. Each KRI has thresholds (often green, amber and red) linked to escalation and to the risk appetite.
Credit limitA credit limit is the maximum exposure a lender is willing to have to a borrower, a group of connected clients, a sector or a country. Limits are approved by delegated authority, monitored daily or monthly, and breaches are escalated.
RAROC (risk-adjusted return on capital)RAROC divides a risk-adjusted profit (revenue minus costs and expected loss) by the economic or regulatory capital a deal or business consumes. Banks compare it with a hurdle rate to price loans and decide where to allocate capital. RORAC is a close variant.
Three lines model (three lines of defence)The three lines model splits responsibility for risk: the first line (business and operations) owns and manages risks, the second line (risk management and compliance) sets frameworks and challenges, and the third line (internal audit) gives independent assurance to the board. It is also called the three lines of defence.

Updated 31 Oct 2026.