In November, NCUA issued a Supervisory Letter as part of Letter to Credit Unions No. 13-CU-12. The letter clarifies the agency’s expectations regarding natural-person credit union risk management systems.
NCUA points out that enterprise risk management (ERM) might benefit larger, more complex credit unions and that examiners should make sure credit unions employ a comprehensive risk management approach. This might or might not include a formal ERM program, NCUA says.
But it’s likely the letter created more questions than it answered. The overall question the letter raised: What’s the difference between our industry’s traditional approach to risk management and ERM?
To better understand ERM, compare the different approaches and responsibilities.
Risk management vs. ERM
Traditional risk management encompasses only hazard and transactional (operational) risk exposures. There’s no upside or positive outcome for these risks, other than the status quo. ERM includes all risks your credit union faces, regardless of their source or potential outcome.
With ERM, you consider the upside of risk, such as the possibility your credit union will outperform your strategic goals. ERM also removes the NCUA’s key risk indicators (credit risk, interest-rate risk, liquidity risk, transactional risk, compliance risk, strategic risk, and reputational risk) from individual silos, and addresses all risks as part of your credit union’s overall strategy.
The ERM process optimizes risk taking in relationship with strategic goals, while traditional risk management simply aims to prevent or reduce losses.
For example, ERM would include an assessment of competitive challenges, such as plans by competitors to build new branches within your local market. It would also examine the potential impact of a significant reputational hit, such as a highly publicized data breach or a top executive being prosecuted for embezzlement.
NCUA acknowledges that most credit unions don’t have the means for expensive ERM software and other tools used to consolidate and assess this broad swath of information. But a basic understanding of how to transcend individual operational risk assessment can improve your credit union’s value.
Risk manager vs. enterprise risk manager
In traditional risk management, the responsibility for managing all of a credit union’s operational risk belongs to one department or one individual. This person or department owns all operational risk.
In ERM, the enterprise risk manager (often referred to as the chief risk officer) acts as a facilitator and educator about the ERM process.
This person serves as a coach to all the risk owners in the credit union. In ERM, all employees are risk managers. They manage the risk for functions within their responsibility. The person closest to the risk is best positioned to evaluate and manage it. Each function has a risk owner who reports to the enterprise risk manager.
ERM allows information to flow throughout your credit union, avoiding information silos that prevent critical information from reaching key people.
The “enterprise” in ERM includes all employees, management, board of directors, committees, members, the community, and regulators. The more your employees know about the risks your credit union faces, the more they can participate in finding and executing solutions, and in capitalizing on opportunities.