The uncertainty and volatility of the economy have drastically changed how all industries view risk, including credit unions. In past decades, credit unions and other financial corporations relied heavily on forecasts and projections to manage their daily operations.
In today’s marketplace, forecasts and projections are not enough. Credit unions must consider the internal and external factors and influences that create uncertainty about achieving their plans and objectives. New and emerging risks create uncertainty in financial institutions of all kinds.
Boards and managers of credit unions must take risks from all sources into consideration when pursuing strategic planning. Boards and managers that fail to identify and plan for risks may cause credit unions to veer off track when risk factors begin to affect their objectives.
Rigorous risk management plans help credit unions to avoid internal and external risks, minimize the impact of risks, and help boards and managers cope with risks when they occur.
Why Credit Unions Need to Understand Risk Management
Credit unions face a multitude of risks including risks related to credit, interest rates, liquidity, transactions, compliance, strategy, and protecting their reputation.
“Managing risk is critical to the credit union’s success. It is at the heart of strategic performance. The ability to proactively identify and understand the rapidly evolving challenges ahead allows the organization to pivot and seize new opportunities or avoid head-on problems.” Tony Ferris, CEO of Rochdale Paragon Group
Knowing how to identify potential risks and forming plans to manage them before they negatively affect the business positions credit unions to act on future business decisions with confidence. Credit union managers and boards who acquire knowledge about risk and risk management will find the best options for how to respond to risk before it has a devastating impact on the business.
What Are the Internal and External Risk Factors That Concern Credit Unions?
The difference between internal and external risk factors is credit union managers have some control over internal risk factors. By contrast, they have no control over external risk factors.
External risk factors that credit unions face include things like natural disasters, exchange rates, cybercrime, interest rates, and loss of funds due to theft.
Credit unions also face such internal risks as internal fraud, regulatory non-compliance, data breaches, legal risks, and liability for injuries of consumers and staff.
Effectively Managing Credit Union Risks
Risk management plans don’t necessarily have to be highly sophisticated to be effective. Sound risk management plans contain certain valuable components.
First, boards and managers of credit unions need to be able to conduct comprehensive assessments to identify the risks that stand to have the greatest negative impact on the credit union’s strategic goals. These assessments should be standardized and should take the scope of the enterprise into account. Assessments should include looking at things that could go wrong as a result of the credit union’s work and injuries at the workplace site.
Next, boards and managers need to analyze and prioritize risks and assign them a high or a low priority. The analysis should also factor in the probability of the risk and the depth and breadth of any negative impact on the credit union and its members.
Boards need to prioritize planning for the most significant risks to financial planning, operations, and strategic goals. Boards and managers will need to collaborate on how to prevent losses from occurring and how to recover from those losses if they do occur.
Boards also need to determine where they will retrieve funds before a loss occurs.
Risk management is an ongoing process because internal and external actors are becoming more sophisticated. Boards need to monitor the effectiveness of their risk management plans and implement changes as they become necessary.
Regulatory changes are on the rise. Part of risk management strategies for credit unions and other corporations within the financial industry requires boards to stay abreast of regulatory changes. Boards have the responsibility for making sure that their credit unions continually comply with all applicable laws and regulations while keeping the costs of risk management implementation at bay.
Risk Management Strategies for Credit Unions
The economy has been uncertain for the last decade or so. The pandemic, many natural disasters, and political unrest all contribute to the uncertainty credit union boards face.
As your credit union navigates emerging risks, here are 6 risk management strategies to take you into the future:
- Proactively manage collections. Invest in technology to make collections quicker and more effective. Consumers have demonstrated they are responsive to self-service options for all transactions, including paying their debts.
- Leverage insight from data. There are many data mining programs available to help you maximize the data you are already collecting. These companies can give you insight as to how to better respond to your members.
- Use data to better identify and understand risks. The volume of repossessions has lowered, and auto loan defaults have also decreased. By following metrics in the industry, your board can reduce your exposures and address risks proactively.
- Be watchful of regulatory changes. State and federal governments have issued moratoriums because of the pandemic, but they are not likely to continue. Governments have also been evaluating auxiliary products purchased with auto loans.
- Join forces with other financial institutions to retain repossession agents. Repossession agents are in high demand and sharing resources with other lenders will help credit unions stay competitive.
- Optimize risk services. Use predictive modeling, insurance tracking, location services, and loss mitigation to help reduce risks and plan for the future.
What Are the Benefits of a Risk Management Plan?
Credit unions will derive much value from a well-developed risk management plan.
Risk management plans save such valuable resources as people, property, assets, time, and income.
Risk management plans will help ensure that the credit union’s facilities and environments are safe for staff, customers, and visitors.
Additional protections risk management plans provide are protecting people, the environment, and the credit union’s assets from harm, which will, in turn, strengthen the stability of their overall operations.
Liability is always a concern for credit unions. Having a competent risk management plan will reduce legal liability, and along with it, the threat of potential litigation. Insurance policies are one of the risk management department’s tools for managing risk. Credit unions that work diligently to identify their risks and have plans to mitigate them effectively can often work with insurance companies to help define their insurance needs while keeping their insurance premiums as low as possible.
Credit unions simply can’t afford to overlook the risks of internal and external risk factors and other influencers. Making risk management a high priority is a must for all financial institutions of today.