Americans from all walks of life are benefiting from a strong, resilient, and dynamic economy, which boasts nearly six years of uninterrupted growth. While this economic landscape presents credit unions and affiliated organizations such as CUSOs with tremendous opportunities for innovation, growth, and enhancements to member services, it also brings real and often complex financial risks that can and must be managed.
The good news is that, through proactive management and implementation of forward looking strategies that identify, categorize, and respond to risk, credit unions today continue to prosper. The numbers tell much of the story. Credit unions serve over 89 million member owners and have accumulated more than $700 billion dollars in assets. I am particularly impressed that even in the current flattened yield curve environment, credit unions have posted an average net worth of 11.54 %. Against this backdrop, as a safety and soundness regulator, I constantly promote a regulatory approach that encourages an appropriate, but not excessive regime that empowers credit unions to optimize service to their members in a safe and financially prudent manner.
I am also committed to making certain that NCUA provides consistent and coherent guidance to credit unions and CUSOs. This January I hosted a summit at the U.S. Chamber of Commerce, bringing together experts from the White House, the Federal Reserve, NCUA, and Wall Street, to discuss a broad range of risk management topics. The summit was a substantive effort to highlight not only trends in risk management, but also hands-on, practical strategies that credit unions can implement as they manage their balance sheets.
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One facet of the discussion that became a central focus of the summit was Enterprise Risk Management (ERM). This term is widely used in the financial marketplace to define an effective and holistic approach to measuring and managing major risk types based on their simultaneous consideration, thus allowing a credit union to understand and adjust its risk exposure while maximizing opportunities for their members.
The vagaries of the housing market, an uncertain interest rate environment, natural disasters, and BSA compliance are just a few of the challenges facing credit unions today and into the future. By implementing an ERM system, credit unions will succeed in strengthening balance sheets by matching risk with reward, resulting in greater member value, economic growth, while transforming communities. While not a primary rationale for effective ERM, I also firmly believe that improved ability to serve all members, particularly those of modest means, will be a by-product that pays large dividends for the entire credit union industry.
Although each institution will implement an ERM system that suits its own unique needs, I recommend several components worth consideration, including:
-Development of risk management objectives which align with the internal mission, environment, and values of the institution;
-Identification and assessment of internal and external risks;
-Policies and procedures which adequately respond to risks;
-Enterprise-wide monitoring plans flexible enough to be modified as necessary;
-Dissemination of essential information throughout the institution in a rapid manner; and
-Compliance with regulations and laws relevant to the institution.
I urge credit unions to address all areas of operation and develop risk assessment by taking into account membership, products and services offered, and locations of branches which may be affected by occurrences such as natural disasters or vulnerability to financial crime and suspicious activity. Policies and procedures should be based upon the risk assessment and must be implemented, explained to the NCUA examiners, and reviewed periodically for updates to regulations and any changes to the credit union's operations. Since there will be varying levels of risk within any type of product or category of members, and all credit unions do not engage in identical types of transactions, a detailed risk assessment will enable NCUA staff to factor this variance into the examination process. Helpful compliance guidance is available via NCUA's Web site, the Agency's Express Subscription service, and through the Financial Crimes Enforcement Network's (FinCEN) notification system. Prospectively, I encourage the credit union system to take advantage of ERM best practices and resources that will be shared during an NCUA summit on the topic that I am organizing for 2008.
Fully understanding that institutions vary in size and may not possess the infrastructure and resources conducive to the creation and implementation of an effective risk management system, I strongly believe that CUSOs can be a natural and important partner in this process, particularly as a cost effective developer and provider of specific ERM products.
Since their inception, CUSOs have embodied the "people helping people" philosophy by expanding the menu of credit union member service options.
In analyzing the challenges in the credit union industry today, it is apparent that many relate to a lack of economies of scale. At approximately 5.8% of the financial services industry's assets, credit unions occupy a relatively small niche in the marketplace. CUSOs help address size-related issues by facilitating collaboration and enhancing the cooperative business model by bringing credit unions together to work collectively. This in turn creates a platform that empowers credit unions to develop lower-cost operations and higher-value products and services that ultimately translate into increased value for members. Diligence in this area helps credit unions identify real-world strategies for collaboration, which in turn lead to large-scale opportunities that allow credit unions to transcend the limitations imposed by financial and operational resources. Because of CUSOs, a credit union's reach does not have to exceed its grasp.
CUSOs have partnered with credit unions to provide innovative services, such as business lending products which help member-owners establish viable businesses and provide workers with access to quality and affordable Health Savings Accounts. This is an opportune moment for CUSOs to further strengthen the credit union system by devoting more resources, staff, and outreach in an effort to make ERM practices and services a central aspect of credit union operations. Enterprise-wide management skills should be accentuated as CUSOs recruit and train employees. And a robust outreach effort should be made to educate credit union professionals and volunteers about the importance of ERM. A very wise Benjamin Franklin said that "there's no time like the present," a concept that comes to mind when contemplating the CUSO dimension of ERM.
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