Credit Policy 2: Risk Appetite Isn’t Just a Boardroom Phrase - It Shapes Every Deal

I’ve seen “risk appetite” was tossed around like a buzzword - right up there with “synergy” and “alignment.” But spend enough time in credit, and you realize risk appetite isn’t jargon. It’s direction. It’s the invisible line that determines what gets funded and what doesn’t.

The best credit policies start with a clear, honest statement about risk appetite. Because if you don’t know what kind of risk you’re willing to take, you’ll end up taking all kinds, whether you mean to or not.

Understanding What You Can Tolerate and What You Can’t

Every lender has limits, whether they’re defined or not. Some are financial, like maximum exposure on a borrower or property type. Some are strategic, like choosing to avoid certain markets or client profiles. And some are cultural. A firm that says “yes” too easily? That’s a risk appetite problem wearing a customer service badge.

Your credit policy should spell this out clearly:

• What kind of clients are you built to serve?

• How much loss are you willing to tolerate and how often?

• What types of lending behavior are red lines (e.g., fraud history, prior bankruptcy)?

• What’s your view on LTV or rates at different risk levels?

This isn’t about saying no. It’s about knowing what a good “yes” looks like.

Risk Appetite does not equal Risk Capacity

One lesson that took me a while to learn: just because you can fund something doesn’t mean you should. Risk capacity is about financial ability—how much risk your balance sheet can technically absorb. Risk appetite is about philosophy. Culture. Comfort.

A lender might have the capacity to take on 90% LTV on rural properties—but if that doesn’t align with your funding model, your investor profile, or your stress test results, then it’s outside your appetite.

Your policy needs to bridge that gap between possibility and intention.

Appetite Drives Design

Here’s the practical payoff: once you define your risk appetite, you can design around it. Products, pricing and processes all flow from that foundation.

• If you have a high risk appetite, you’ll want tighter controls, shorter terms, and more rigorous pricing.

• If you prefer low to moderate risk, you’ll build in margin buffers, conservative LTVs, and automated exceptions.

In either case, appetite drives consistency and consistency helps manage losses.

Your Underwriters Will Thank You

When appetite is clear, underwriters stop guessing. They know where the boundaries are. They know when to escalate. And they stop wasting time on files that were never going to fit in the first place.