10 Reasons Things Went Wrong… Has Anything Really Changed?
For years, we have been emphasizing a list of 10 reasons (not in order of priority) risks are not appropriately managed in the financial services industry. Many of these reasons contributed to the volatile economic environment we find ourselves in today.
- Mindset—We can take action when bad things happen so things will never be as bad as risk simulations are showing—forgetting that the point at which we address a problem is directly related to the number of viable options we have for solving it
- Decision-makers don’t agree on appetite for risk
- Decision-makers agree on appetite for risk but don’t make the tough decisions to manage within their appetite
- Decision-makers take on more risk than they are truly comfortable taking because “everyone else is doing it”— so it must be right…
- Lack of effective communication between decision-makers and risk quantifiers
- Short-term decision making
- Decision-makers not linking strategy and A/LM (financial structure management)
- Contingency plans are not tested to determine if they are adequate
- Using old decision drivers and measures of success in a new environment—following peers
- Improper risk quantification providing a false sense of security
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Recent history has shown us the havoc caused by inadequate risk management, and we are concerned that the havoc will continue or worsen if something doesn’t change.
Many in the financial services industry continue to worry over tightening margins, threats to non-interest income, diminished loan growth—the list goes on. However, we urge all stakeholders to consider the long-term viability of their credit union rather than rely on short-term decision making (#6).
We are seeing more and more credit unions focus on short-term “Band-Aids” instead of taking a longer-term view of making sustainable changes to the way they do business. Short-term solutions often come with long-term consequences—some of which could be another cycle of credit losses, assessments or even renewed stabilization efforts.
There are no easy, quick fixes for the financial services industry. The situation requires a thorough evaluation of the sustainability of current business models and, most likely, redefining measures of success.
