Does your credit union have a risk appetite statement? If you do, does it meet the following criteria?

Promotes proactive engagement from top-down Board leadership and bottom-up management in identifying, monitoring, measuring and reporting risk exposures;
Embeds a risk-taking philosophy into the institution's culture;
Act as an inhibitor against excessive risk-taking and risk-avoidance; and
Promotes a dialogue between management and the Board of Directors on whether the institution is achieving an appropriate balance between risk and reward.

A risk appetite won't spare your institution from the next financial crisis, but it will help prepare you to navigate the uncertainty. If you haven't developed a risk appetite statement or your existing statement collects dust in between its annual stamp of approval, here are several tips for a successful statement.

Don't stress over your risk taxonomy or comprehensive framework of risk categories. Your analysis matters more than your structure. There isn't a U.S. regulator that prescribes a specific risk taxonomy. It's recommended to use a proven and flexible method to categorize risks. Stick with the proven primary categories of credit, market, liquidity, operational, compliance and strategic, and allow sub-categories to develop within the aforementioned primary categories according to your institution's needs.
Risk exposures are derivatives of the products and services the institution offers. Itemize your products and services against your risk taxonomy to identify inherent risk drivers. Leverage your risk appetite statement to set forth allowed and disallowed products and services explicitly.
Evaluate your strategic plan for risk drivers. What are the objectives? What are the internal and external threats? How might a strategy focused on increasing digital market presence differ from a strategy of deploying an ITM network? How does your balance sheet strategy influence your market and liquidity risk appetite?
Integrate your stress test (IRR, capital, liquidity, etc.) scenarios and results into your risk appetite.
Consider the macroeconomic data used during your budgeting and CECL process while developing the inherent risk factors.
Leverage peer benchmarking data to challenge your risk appetite position. For example, I've worked with institutions whose credit risk appetite is "low"; however, their past due loan and concentration metrics, compared to the industry, would indicate a very different story.

Throughout history, banking crises have been associated with a range of factors, including economic imbalances, speculative bubbles, inadequate regulation and financial innovation. Each crisis has contributed to the evolution of financial regulations and risk management practices in an effort to prevent or mitigate future crises. How can you successfully navigate the uncertainty if you haven't developed a process to communicate your enterprise risk? Take the time to develop a meaningful risk appetite statement and consider tapping the outside expertise of an industry partner, as needed, to help you monitor and manage your risks. Your regulator will thank you, your Board will thank you and history may just be on your side during the next crisis.

Instant Insights /

How to Prepare for Increased Regulatory Scrutiny With Enterprise Risk Management

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