LEDYARD, Conn. — If you take on risk, as credit unions do, you have to have enterprise risk management.
That was the theme of the preconference session at the Members United Corporate Federal Credit Union Economic Forum here June 2. "You have a balance sheet, you have risk," Members United Chief Risk Officer Larry Harmon observed. "Basically risk is the possibility that an event will occur and adversely affect the achievement of an objective."
Risk is not static, but represents a whole range of potential results. However, Harmon emphasized, "Risk encompasses both opportunities, because if we manage risk properly you take opportunities and you look at threats."
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Risk assessment is job No. 1. Experts in the specific subject matter should be engaged, whether in-house or via a third party. When possible, it should be done before a credit union enters into a new line of business but should also be performed for programs already underway.
Harmon added that ERM helps identify the areas where resources should be concentrated. "If you mitigate all risks, it's very expensive. If you eliminate all the risk, you've just spent all the revenues you intended to make." ERM could have helped prevent some of the current erratic market conditions. "ERM is the best way to provide transparency to the risk we have to take," Advisory Services Executive Director James A. Toliver said. "To who? To our members. To our boards. To our ALCOs."
It can also make things clear for the regulator. NCUA Office of Capital Markets and Planning Director J. Owen Cole explained that ERM, which most credit unions already practice in whole or in part, even under a different moniker, helps provide a more precise picture for the regulators of how credit unions are identifying and mitigating risks. Transparency is a key difference between the current corporate credit union operations and the infamous CapCorp situation in the mid-1990s when the corporate's investment portfolio was not sufficiently diversified, he commented in a later session.
Cole said ERM aligns with NCUA's supervisory focus, including due diligence, risk tolerance levels, data capture and modeling, exposure reports, and committee review. ERM assists with better exam results, he said, by providing better risk identification, measurement and monitoring, as well as improved planning and communication.
The good news is that credit unions are already doing ERM though they may not be calling it that.
Harmon said he is not aware of ERM actually being recorded by any regulatory agency but it will continue to evolve and credit unions can expect more questions surrounding it.
The top question that must be answered, he said, is "How much risk could we encounter and are we willing to accept that?"
Credit unions may not be providing the best service to their members if they are not aware of their risk tolerance. Harmon advocated, "Seize opportunities. Take risk. If you're not taking risk, you're not providing value."
But, in the end, Cole surmised that after a credit union has determined is risk thresholds, "It's OK to say 'no' to something your competition is in."
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