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Risk Management Strategies For Credit Unions

Risk Management Strategies for Credit Unions


As a community bank board member, you understand that the economy’s uncertainty and volatility have significantly transformed how the financial industry, including credit unions, perceives risk. Gone are the days when credit unions solely relied on forecasts and projections to guide daily operations.

The emergence of new risks adds to the complexity faced by financial institutions of all types, and as the board engages in strategic planning, it must be diligent in considering risks from all sources. It is essential for both the board and management to identify and proactively plan for these risks.

To safeguard the interests of stakeholders and ensure the long-term success of your community bank, adopting rigorous risk management plans becomes a “must-do” activity. These plans help not only avoid internal and external risks but also minimize their impact when they do arise. By being prepared to confront risks head-on, your community bank or credit union can navigate through challenges and preserve its stability and growth.

Credit Unions and 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

Recognizing potential risks and developing proactive management plans empowers credit unions to make future business decisions with confidence, safeguarding their operations from adverse impacts. 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?

So what are the internal and external risk factors that concern credit unions, and that can impact the financial stability and overall operations? Here are some key internal and external risk factors:

Internal Risk Factors

  • Credit Risk: This is the risk of potential losses arising from borrowers or members failing to repay their loans or debts, leading to asset quality deterioration and financial losses for the credit union.
  • Operational Risk: Arises from inadequate or failed internal processes, human errors, technological failures, fraud, and other disruptions that can result in financial losses or damage to the credit union’s reputation.
  • Compliance and Regulatory Risk: Credit unions must adhere to numerous laws, regulations, and industry standards. Failure to comply with these requirements can lead to penalties, legal actions, or reputational damage.
  • Liquidity Risk: The risk of not having sufficient liquid assets to meet the credit union’s short-term obligations, which could impact its ability to function effectively and serve its members.
  • Interest Rate Risk: Credit unions often have a significant portion of their assets and liabilities tied to interest rates. Fluctuations in interest rates can affect profitability and the value of assets and liabilities.
  • Strategic Risk: This refers to the risk associated with the credit union’s strategic decisions, including entering new markets, introducing new products, or expanding services.
  • Reputation Risk: Negative publicity, customer dissatisfaction, or public perception issues can damage the credit union’s reputation and erode member trust.

External Risk Factors

  • Economic Conditions: Changes in the broader economic environment, such as economic downturns, inflation, or recession, can impact borrowers’ ability to repay loans and affect the credit union’s financial performance.
  • Market Risk: Fluctuations in the financial markets, including interest rates, foreign exchange rates, and stock prices, can impact the credit union’s investment portfolio and overall financial health.
  • Regulatory Environment: Changes in laws, regulations, or policies can impose new compliance requirements or restrict certain activities, affecting the credit union’s operations and profitability.
  • Technological Advancements and Cybersecurity: As technology evolves, credit unions must adapt to stay competitive. However, technological advancements can also introduce new cybersecurity threats and vulnerabilities.
  • Competitive Landscape: Credit unions face competition not only from other financial institutions but also from emerging fintech companies, which can affect market share and member acquisition.
  • Natural Disasters and Catastrophic Events: Natural disasters or catastrophic events can disrupt operations, damage physical assets, and affect the credit union’s ability to serve its members.

Understanding and effectively managing these internal and external risk factors is crucial for the long-term success and sustainability of a community bank or credit union. As a board member, it is essential to work with management to develop robust risk management strategies to mitigate these risks and ensure the credit union’s stability and growth.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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. They also help ensure that the credit union’s facilities and environments are safe for staff, customers, and visitors.

Additional protections that risk management plans provide are to protect 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 influences. Making risk management a high priority is a must for all financial institutions of today.

If you would like to learn more about how BoardEffect can support your risk management planning, we’d love to speak with you! Request a demo and let us share how we help more than 5,000 boards in 48 countries.

BoardEffect, a Diligent solution, leads in providing innovative boardroom technology to volunteer boards. Serving mission-driven organizations, we empower boards with tools to drive positive change. Our secure board management software streamlines operations, enhances governance practices, and enables confident decision-making. With BoardEffect, mission-driven organizations unlock potential, accelerate mission delivery and make a lasting impact in their communities.

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