The Financial Stability Board (FSB) is proposing a set of principles to guide financial firms, and their regulators, in calibrating firms’ willingness to take on risk.

The FSB launched a public consultation Wednesday on draft principles for establishing an effective ‘risk appetite framework’, which it calls the foundation of good risk management. “A firm’s risk appetite represents the aggregate level and types of risk a firm is willing to assume… to achieve its strategic objectives and business plan, and this should be set out in written form in a risk appetite statement,” it says.

These risk appetite statements should then, in turn, be linked to firms’ short- and long-term strategic, capital and financial plans, and their compensation practices, the FSB notes. And, it says that they should assess firms’ material risks under both normal and stressed market and macroeconomic conditions, and set clear boundaries by establishing quantitative limits and qualitative statements for risks that are difficult to measure.

“Changes to the financial and regulatory environment underscore the importance for firms to be able to make well-informed and forward-looking strategic decisions that can affect their ability to manage risk prudently and to remain profitable over time. Defining, measuring, monitoring, and articulating a clearly defined risk appetite for the firm is critical to guiding those strategic decisions,” said Julie Dickson, superintendent of the Office of the Superintendent of Financial Institutions (OSFI) and chair of the FSB Supervisory Intensity and Effectiveness Group.

The FSB says that its proposed principles will enhance supervisory oversight of firms, particularly systemically important financial institutions, by establishing minimum expectations for the key elements contained in an effective risk appetite framework. They also aim to establish a common terminology to improve understanding between regulators and firms, and to narrow any gaps between supervisory expectations and firms’ practices.

Comments on the proposals are due by September 30.