Concentration Risk Assessments Open Doors
Never in the history of the credit union industry has so much emphasis been put on risk concentrations. There is no need to wonder why. High concentrations of certain risks are a major cause of credit union failures.
What is unique about our current environment is the number of risks that have materialized into losses during recent years. So it’s no longer just interest rate and default risks that are getting the attention of examiners. These days other risks are being emphasized with equal fervor, such as, collateral, liquidity, transaction, delivery channel and third-party risks, just to name a few.
ABCCU chose three asset segments and three measurement areas. The credit union already performed assessments on default risk, interest rate risk and product profitability. The results of the three assessments were used to assign a rating to each asset group. The scorecard shows the average rating for each asset group and the weighted average rating for each risk category. These average ratings make it easy to determine where ABCCU concentrations lie.
Having a rating of 2.3, the first-mortgage loan product presents a significant amount of concentration risk, but not just because this loan product accounts for 60% of the credit union’s assets. This product has high interest rate risk and is not profitable.