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c. notes – Aggregating Risks to Inform Strategy

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To remain successful as the world changes and becomes more complex, risk management processes must keep pace.

Risk management begins with identifying and quantifying strategic risks. An effective process also recognizes that it is not adequate to only quantify and understand risks in silos. Risks should also be quantified and understood in aggregate. As history repeatedly taught us, bad things don’t usually happen in isolation.

Understanding and communicating risks in aggregate allows decision-makers to evaluate if the credit union is taking on too much risk, or if the credit union may be poised to strategically accept more risk. Also note that understanding risks in aggregate permits management to consider the credit union’s capacity for strategic opportunities; strategic risks and opportunities are two sides of the same coin.

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Appropriately Managing Risks to Net Worth

Many risks are present in credit union structures and business models today. Interest rate risk, liquidity risk, credit risk, compliance risk, regulatory risk, business risk, fraud risk—the list can go on and on. Increasing regulatory pressure to ensure that all risks are understood and quantified heightens the stakes for all involved in the risk management process. Sometimes, the volume of risks can lead many managers to become overwhelmed.

For instance, think about how much net worth is at risk in your credit union’s structure from:

  • Interest rate risk
  • Liquidity risk
  • Credit risk (beyond PLL expectations and current reserves)
  • Business risk
  • Regulatory risk

The key in evaluating any of the risks above is to determine the level of impact for which the credit union wants to be prepared. Regarding interest rate risk, what is the amount of net worth placed at risk in the interest rate environment the credit union wants to protect against? From a liquidity standpoint, what would the potential cost(s) be of an unplanned liquidity shortfall? Strategically, what areas of business is the credit union involved in that may be threatened – either from competition or from an over-dependence on a source of revenue? None of the above are easy questions to answer, but starting with a list of your management team’s concerns is a good starting point to ensure that the credit union has a sufficient level of net worth.

Before tying the hands of decision makers by creating unnecessary policies and procedures, take the time to discuss all risks present in the credit union, and how to best address them. First discussing and then understanding the risks the credit union is exposed to is often more than half the battle when quantifying the enterprise-wide risks to net worth.