A ship is safe in harbor, former Rear Adm. Grace Hopper once said, but that’s not what ships are for. Correspondingly, a credit union exists for the betterment of members, not itself—or to appease skittish regulators by avoiding all risk.
During the past century, credit unions have provided members with an exclusive value proposition by leveraging the collective whole of their membership. Looking forward, however, many are calling that value proposition into question.
Strengthening your communities, building a large member base, providing support to members in their time of need, and building the financial reserves to carry you forward have left many credit unions white-knuckled, holding tight to the past while facing a tumultuous future.
That’s why it’s important to challenge the thinking and actions your credit union takes, especially during its strategic planning process. Doing so involves thinking about the decisions you make—and how you make them—in pursuit of the organization’s vision.
The goal: Create value through the development of a world-class risk management culture.
Uncertainty can leave many leaders stationary and cautious. And historical successes and failures oft en leave organizations stagnant and risk-averse.
Even personal life lessons reinforce leaders’ propensity to guard against losing things of value, whether it be your hearts, wallets, or egos. The unfortunate reality is that situations change—organizations and industries go through life cycles just as humans do.
Transformation faces us on all fronts: social, political, technological, and economic. The question is, how do you respond to change? Do you see and understand it? Do you admit that it’s taking place—and are you willing to take bold action?
These lessons weren’t lost on the credit union movement’s founding fathers.
As credit union pioneer Roy Bergengren once said, “All human progress is made in spite of the opposition of the set majority who react almost automatically against every new idea.”
The point is that in the face of risk, early credit union leaders forged ahead knowing that only through taking risk could they create value. Given the era, these principles were revolutionary.
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Today, however, many view risk in one context: bad. But risk drives learning, opportunity, and prosperity. And organizations often fall prey to their own success.
James Collins’ book, “How the Mighty Fall,” depicts the life cycle of most organizations, even those once thought unstoppable.
The common thread centers on the need for organizations to be relentlessly critical of their successes and abilities, and to act boldly.
In sum, this is risk management. Risk management has the capability to provide a sustainable competitive advantage. Namely:
Risk is required
ERM recognizes that credit unions must take risk. Your role as financial intermediaries is to intermediate risks your members can’t or won’t make. Successfully competing in a dynamic environment demands that you take risks to continually evolve and innovate.
But despite the overwhelming evidence, credit unions often elect the path of least risk until it’s too late. While some credit unions undertake new and unique directions, most favor a benign approach.
Credit unions tend to carry considerably more conservative investments, loans, and capital levels than their competitors. Industry outsiders regularly criticize credit unions for the excessive capital they maintain (aggregate of $44 billion in excess capital above the regulatory minimum to be classified well-capitalized) and for their level of credit risk.
This isn’t due to a lack of passion or effort, an analysis by The Rochdale Group shows. Rather, it’s a function of risk process and culture that starts at the top and cascades through the organization.
But the answer isn’t simply to take more risk. It’s about understanding how much risk you already have (residual risk level), how much risk you can take (risk capacity), where you want to take risk, and what types of risks you can leverage in pursuit of organizational goals.
This can’t be done in isolation but through careful consideration and deliberation of the credit union’s mission, values, and vision. And your entire organization must view risk holistically.
To remain focused, credit unions must tie together operational risks, risk appetite, and strategy. Risk appetite is a tool to shape organizational performance and manage your approach to achieving organizational goals and strategies. It represents the amount of risk you’re willing to accept in pursuit of organizational value.
As you venture through the risk appetite process, you’ll try to decipher and articulate those actions and activities you’re willing to pursue—and those that you’d rather sidestep. If you’re unwilling to assume certain risks in pursuit of your objectives, you should revisit where you want to be or find alternative ways to get there.
The process of defining and understanding the risk you assume and setting established boundaries helps to align performance activity and shape actions and decisions. It also aids in prioritizing resources, and identifies inconsistencies within strategies and organizational initiatives.
In the broadest sense, risk appetite serves as a governance and performance set of filters helping to ensure you meet the credit union’s goals.
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