As a credit union owner, you know that credit unions now face increasingly complex and dynamic regulatory and risk environments. While all businesses, both small and large, face several risks to achieving their goals and objectives, note that few spend sufficient time and resources identifying these risks and developing robust plans and strategies to overcome or preempt them.
However, as your business recognizes the significant and profound impact that unforeseen events are likely to have on it, you should turn to risk management as part of your strategic business plans.
Also, note that traditional management methods, usually manual, disconnected and spreadsheet-based, result in siloed data and inconsistent processes. And this kind of approach to risk management cannot align various risk management activities across your institution and will not equip your credit union to assess, manage, monitor, and minimize risks in real-time.
Did you know that risk management programs and plans to date have primarily focused on internal controls; however, effective risk management goes beyond that. For example, it must also consider your credit union’s risk appetite.
What is Risk Management?
We can say that fundamentally, most credit unions are engaged in the business of managing risk. Many of the risks that your credit union faces fall into several broad categories, like hazard risks from property damage, legal action, natural disasters, various financial risks linked to lending, markets, and currency/strategic risks like competition with other unions and financial institutions.
You may know that in many credit unions, these risks are often managed individually and in a silo approach, which is not very productive. Although an effective risk management program doesn’t necessarily replace all these existing risk management practices in your union, it can certainly serve to form a standard sharing of risk-related information. This will result in a comprehensive and detailed view of risk across your organization.
And this helps create increased transparency and an understanding of all risks, such as financial risks, organization-wide, allowing for gaps in the risk management framework to be identified. As a result, successful risk management strategies allow your credit unions to assess risks globally, with a proactive and forward-looking perspective. And this results in more effective risk management, especially on an enterprise-wide basis.
Although there are many different tools and techniques to manage risks, note that most of them involve clearly laying out your goals, identifying several factors that may affect your union’s ability to achieve these goals, evaluating both the likelihood as well as the impact of these factors, and then developing practical plans to address these risks.
So, risk management is a strategic and collaborative process that identifies, manages, and monitors organizational risks, both external and internal, to ensure achievement of your credit union’s strategic goals and objectives and continued financial viability and stability.
And, it is worth noting that risk management is more than merely identifying control weaknesses in your organization; instead, it helps identify potential risk events that could result in damaging or negative consequences for your organization. Keep in mind that it is also carefully designed to ensure that risk is effectively managed within your credit union’s risk appetite or tolerance level.
Why should Credit Unions Care about Risk Management?
There is no doubt that credit unions have many causes of business uncertainty. This uncertainty is why both boards and managers have to give risk management in their organizations a high priority. Also, note that knowing how to effectively identify potential risks and devising plans to manage and mitigate them before they adversely affect your business positions your credit union to act on many future business decisions with a lot of confidence.
So, acquiring knowledge and getting familiar with risk and risk management offer managers and boards of credit unions a better set of options to respond to threats before they have a devastating impact on your business.
A comprehensive risk management program will benefit your organization in the following ways:
Provides a complete and clear view of organizational risk along with a framework to consider the way these risks interrelate, which results in better decision–making established a philosophy regarding both risks and a risk culture, which includes aligning risk appetite and overall strategy allows your management to identify and manage emerging risks, thus reducing the risk of any surprises and potential lossesFacilitates effective and efficient allocation of resources through risk/reward analysis, identification of opportunities for process improvement and elimination of many redundant risk management activities
Top Risk Management Strategies
1. Comprehensive Risk Assessment
This is a fundamental part of any risk management strategy. Risk assessments should ideally be standardized and also consider the scope of your enterprise. Risk assessments must consider things that may go wrong due to the credit union’s work, such as workplace injuries.
Did you know that many organizations depend on risk-assessment heat maps during risk assessments to determine their union’s vulnerabilities?
Although these heat maps reveal medium, high, and low-risk areas within an organization and the impact and likeliness of an adverse event, note that they do not help you determine why a risk exists or the actions that each risk rating requires.
So, to receive a more relevant and informative assessment, you have to understand both risk context and trends by evaluating numerous factors, like:
- The root cause of the relevant risk
- Likelihood of an adverse event
- Effect of an adverse event
- Preparedness to effectively respond to an adverse event
- The trajectory of risk—decreasing, increasing, or flat
- Activities and steps to manage or minimize risk
- A suitable description of the environment
These factors require collaboration, and you can use team chat apps to increase the cooperation between your team members. You can also use messaging tools and Webchat. Keep in mind that a thorough and comprehensive risk assessment that carefully analyzes all these elements will allow your organization to identify and address risk areas based on each area’s specific and unique circumstances. And that is not all; it can inspire your organization to devise new and improved mitigation strategies to prevent, minimize, or manage future exposure.
And new risk mitigation strategies may take the form of systems, policies and procedures, processes, and education, among others.
2. Monitor and Evaluate
Measuring your performance, such as lending performance, is an on-going process that must be monitored monthly. Timely, consistent, and accurate measurements are essential as they will help you determine if risk levels in your organization are increasing, stable, or decreasing.
It is also crucial that credit union management and the board of directors implement an early warning process that alerts management when your union is approaching its risk limit. And similarly, these reports should also indicate when it may be suitable for your credit union to take on additional risk.
Identifying key risk indicators can help your credit union be on the constant lookout for signs of higher exposure. Examples of risk indicators include:
- A high concentration of specific loan types measured as a percentage of aggregate portfolio value
- A considerable increase in the time of delinquency aging
- Keep track of areas, like loan risk grades
3. Create an Effective Risk Management Structure
A well structured and comprehensive risk management system will successfully address several key areas, ranging from loan and application reviews to regulatory compliance.
And it is equally vital to ensure that controls are suitable for the specific business units in your union. Policies are effective processes that offer assurance and confidence that the risk management strategy meets all regulatory expectations and needs.
You can also integrate practices into your credit union’s daily workflows so that scenarios and situations involving exceptions, for instance, can be targeted as well as rectified well before they can become sore spots.
4. Leverage Technology to Manage Organizational Risk and Compliance
Efficiently and effectively addressing the increasing risk and compliance burden often require the same solutions that you may have already used to improve your operational efficiency, such as improving automation, streamline processes, and optimizing staff. The good news is that many credit unions nationwide have avoided the regulators’ typical and implied call for just adding more staff and have instead adopted a better co-sourcing model.
And it is no secret that the Dodd-Frank Act is also increasing the need for considerably more risk controls and risk reporting. All this reporting can be rather time-consuming; this is why automation is more critical than in the past.
5. Track and Report KRIs (Key Risk Indicators)
You may know that KRIs are important metrics credit unions have selected to receive early signs or warnings of increasing risk exposures. Note that they can trigger further investigation and timely follow-up to manage the risks more effectively and efficiently.
These metrics should reflect your union’s risk appetite as well as risk tolerance. For instance, if your credit union has figured out that its residential mortgage loans must not be higher than a specific amount of capital, then a relevant and useful KRI could be the number of residential loans that have originated in the past. You should collect KRI data regularly to get the desired results.
Risk is undoubtedly inherent in the operation of any credit union. As a credit union owner, you should not try to eliminate risk but ensure that you identify and manage risks within your risk tolerance levels.