The Bank for International Settlements Financial Stability Institute has published an FSI Insights paper in which Monica Balan and Raihan Zamil develop a supervisory risk appetite framework for banking supervisors. The paper argues that supervisory authorities should make explicit how much supervisory risk they are willing to tolerate, meaning the risk that supervisory action or inaction fails to achieve prudential objectives, rather than relying on implicit judgments that can produce unclear, inconsistent or delayed supervisory action. The framework is tailored to authorities with a safety and soundness mandate and sets out five core elements: define supervisory risk and the relevant risk taxonomy, including legal risk; establish risk tolerance scales; formulate high-level risk appetite statements; translate those statements into qualitative and quantitative indicators for risk scoping, assessment, communication, action, monitoring and escalation; and support the framework with governance arrangements, including an independent second line function. The paper says this can help supervisors prioritise resources, make trade-offs more transparent and support more timely and consistent intervention. It also notes that few authorities have adopted comparable frameworks, citing Canada’s Office of the Superintendent of Financial Institutions and the European Central Bank Single Supervisory Mechanism, and highlights that international standards require banks, but not supervisors, to maintain risk appetite frameworks. The authors also point to possible future international guidance, including a harmonised definition of supervisory risk and Basel Core Principles criteria that would set minimum expectations for supervisory risk appetite frameworks.
Bank for International Settlements - Financial Stability Institute2026-05-04
Bank for International Settlements Financial Stability Institute paper develops supervisory risk appetite framework for bank supervisors
The Bank for International Settlements’ Financial Stability Institute has issued an FSI Insights paper proposing a supervisory risk appetite framework for banking supervisors, urging authorities to explicitly define the level of supervisory risk they will tolerate. Aimed at safety and soundness mandates, the framework has five elements: risk taxonomy, tolerance scales, high-level appetite statements, indicators, and governance, to improve resource prioritisation and more timely, consistent intervention. The paper notes few authorities currently use such frameworks and suggests future international guidance, including a harmonised definition of supervisory risk and Basel Core Principles criteria on supervisory risk appetite frameworks.