Find your happy place

Determine the right balance of risk and service.

August 7, 2019

The way a credit union manages risk speaks volumes about its member service philosophy, and may put leaders in a tough spot.

Take on too much risk and you’re creating potentially dangerous exposure for the organization. Operate too conservatively and you may fail to meet the real needs of the community you serve.

Either approach, taken to the extreme, could jeopardize your long-term sustainability.

Jeff Rendel consults with credit unions around the country on sales, service, and strategy through his company, Rising Above Enterprises. He often advises credit union leaders to work more collaboratively with their board members to create risk governance strategies that work for their unique memberships.

“It’s impossible to identify one set of numerical benchmarks when it comes to risk governance because each credit union is so unique,” Rendel says. “Credit unions that excel in this area are those with engaged boards whose members are unafraid to ask tough questions.”

One of those questions, he says, has to do with whether your credit union takes on enough risk. He advises institutions to engage with board members on a host of topics, including a discussion of which risks they should take.

“Boards are focused on the long-term safety and continuity of the organization, and they should be,” he says. “But they also need to ask their CEOs, ‘Are we not taking enough risks on behalf of our members?’”

Lynn Ciani

‘Risk governance is how we limit our risk exposure while delivering an excellent member experience.’

Lynn Ciani

A focused approach

Numerica Credit Union in Spokane Valley, Wash., maintains a focused approach regarding risk governance, says Lynn Ciani, chief risk officer at the $2.3 billion asset credit union.

“Numerica views risk governance as essential to ensuring we are capable of meeting our objectives,” Ciani explains. “It is how we limit our risk exposure while delivering an excellent member experience.”

Numerica evaluates each of its material processes, programs, and products from a risk perspective, and develops policies and procedures to mitigate exposure. These risk assessments evaluate credit, interest rate, liquidity, compliance, reputation, and operational risk; the likelihood and significance of these risks; and the controls in place to mitigate them.

This process is both “top-down” and “bottom-up” in the sense that the work of assessing risk involves a wide cross-section of departments and professionals across the organization.

“Each of Numerica’s business areas manage, monitor, and report on actual activity as they compare to limits set forth in our policies, procedures, and guidelines,” says Lisa Sunderman, Numerica’s senior vice president of enterprise risk management.

Rendel recommends a process to establish risk governance that’s more time-intensive than what many organizations typically take on.

“The biggest risks credit unions face are related to credit and interest rates,” he says. “We build in shock analysis to mitigate those risks.

“But what’s even more valuable is a process that runs scenarios up to several times a year to see how these risks play out in the balance sheet,” Rendel continues. “This would allow teams to see the effect of economic changes and prepare them for decisions they may need to make.”

While Numerica addresses credit and interest-rate risks, a good governance approach takes a wider range of pressures into consideration, Sunderman says.

“When determining the largest risks to focus on, I look to where we spend the most time and money,” she explains. “One area that’s received a lot of focus and resources recently is online security. As more members use the convenience of digital and online banking, we have placed a greater emphasis on assessing digital security.”

Fraud risk, economic shifts, and credit concentrations are also near the top of Numerica’s list of focus areas. Shifts in the competitive landscape also present challenges, as does the constant need to attract and retain top talent.

“Risk from competitors has remained constant over the years,” Sunderman says. “But the marketing and production incentive has shifted from an emphasis on loan market share to that of deposit account market share. With respect to personnel, we invest a lot in our culture and training programs to ensure the well-being of our employees.”