Credit unions often view risk management as a regulatory issue, but SACU in San Antonio has flipped that paradigm by also looking at risk management as a strategic tool that drives efficiency.
The $2.8 billion asset credit union has become an industry leader in this area by integrating risk evaluation across departments, developing operational policies that provide clear options for managing interest-rate risk (IRR) and liquidity risk, and introducing a funds transfer pricing (FTP) discipline that helps optimize product margins.
Throughout this process, SACU strives to find avenues where staff can accumulate and share institutional knowledge.
“SACU really does things the right way, and that’s a testimony to its leadership,” says David Faulkner, senior business analyst at Fiserv, which provides SACU’s asset/liability management tool. “They’re a pretty advanced credit union.”
Laurie Thomas, SACU vice president, recently spoke with Credit Union Magazine about the credit union's risk management philosophy and practices.
CU Mag: How does SACU frame its risk tolerance parameters?
Thomas: First and foremost, we consider the regulatory landscape and the parameters we operate within. We consider balance-sheet risks and look at governing mechanisms to include NCUA regulation, supervisory letters, and interagency guidance and policy statements.
We aim for a sound risk management program that combines strategic planning with risk management planning. If we can kill two birds with one stone—do something required from a regulatory perspective in a manner that meets our strategic needs—that’s what we strive to do to strike that balance.
Specifically, we look at the mix of our balance sheet, considering both assets and liabilities. We consider the contractual and/or behavioral characteristics, then step back to consider the risk management tools in our toolkit, such as the deposits mix, the use of wholesale sources of funding (borrowings and loan participations), and the use of derivatives.
We look at all of this as we formulate the appropriate risk appetite with the goal of developing a profile that ensures an appropriate balance between risk and reward. We want to make prudent decisions that remain financially viable across various economic cycles, which will ultimately provide a greater level of sustainability.
CU Mag: What are the major challenges to evaluating risk holistically, and how do you address those obstacles?
Thomas: We have a very good understanding at SACU of the integrated nature of these risks. A good recent example is how we measure, monitor, and manage IRR and liquidity risk.
Credit unions can have a very simple balance sheet or a complex one. The complexity comes when you hold and offer products with longer terms, such as real estate loans. We fall in that space.
So what’s always top of mind is, how do we do that better? The Fiserv tool we use is the Asset/Liability Manager and data management system.
Some people might laugh, but one of the tools we rely on most is good old-fashioned gap analysis. The beauty of a tool like this is its simplicity because you can easily see a balance sheet mismatch.
Members want to borrow money long-term and deposit short-term. Gap analysis paints a visual picture of that.
In addition to traditional tools, we integrate other approaches and look at issues from a system dynamics approach. That means we try to understand nonlinear behaviors.
We’re able to combine data and output from the Asset/Liability Manager and FTP to see how the system behaves. From that work, we started to design our operational IRR and liquidity policies.
In addition to the regulatory policies we are required to develop, we have developed operational policies that provide our Asset/Liability Committee (ALCO) with a road map that shows the various levers we can use in different situations to help us manage IRR and/or liquidity risk to within acceptable levels.
This has been a very critical understanding. When is it appropriate to use interest rates to manage one of these risks? When should we take on additional debt or retire debt, or take on a derivative?
Taking a holistic look at the integration of risk has helped us design operational policies and processes that drive not just understanding but sound operations.
We look at these policies as living, breathing documents that help us develop the most efficient and appropriate balance. It has introduced a much greater level of understanding to where our entire ALCO can stand on a more even footing.
We’re not just measuring and reporting. We have a deeper, critical understanding of how our balance sheet behaves in the present and how it might behave in different rate environments.
Next: The technology advantage