Creating a hierarchy for vague risk terms and customizing their definitions in terms of consequence to enable better management of your business.

1. Risk Appetite & Risk Tolerance Improving their application from the Abstract to Concrete in your existing Risk Framework

2. Nicely Done Don Rumsfeld The Unknown As we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don't know We don't know. — Feb. 12, 2002, Department of Defense news briefing

4. Starting Point: Hierarchy Market Credit Operational Risk Appetite, Tolerance, and Limits are not static. Drivers include market events, weather, economy. Risk Capacity Risk Appetite Risk Tolerance Risk Target or Range Risk Limits

5. Shaping the Definitions Market Credit Operational Set it too high, can lead to disaster. Set it too low = opportunity loss. Capacity = Able Appetite = Willing Tolerance = Maximum per broad classification Target or Range = Optimal level desired Limits = Threshold to control

6. Defined with Consequences Forecast, Expected Range Reserves, Rate Pass Through Mechanism, Budget Cuts Rate relief, other suboptimal resources Capacity= Least desired Appetite = If further short of “Range” than Is covered by your first source of relief Where does relief come from? Tolerance = if short of making your “Range” What is the first source of relief? Target or Range Limits

8. RISK RANGE RISK TOLERANCE With a clearly established value and description of how risk tolerance is calculated, and a resourced process around it, you are on the right path for avoiding surprises. Familiar?