Credit Union Risk Management for Better Financial Stability

Credit unions face unique risks that can impact their financial stability. Credit unions are not-for-profit cooperatives, which means they rely on their members' trust and loyalty.

Effective risk management is crucial for credit unions to maintain their financial stability. According to the article, credit unions with strong risk management practices tend to have lower loan delinquency rates, with an average rate of 1.5% compared to 2.2% for those with weaker practices.

A well-structured risk management strategy can help credit unions identify and mitigate potential risks. By doing so, they can minimize losses and maintain a stable financial position.

A credit union's risk management structure is crucial to its success. It's at the heart of strategic performance, allowing the organization to pivot and seize new opportunities or avoid head-on problems. Tony Ferris, CEO of Rochdale Paragon Group, emphasizes the importance of managing risk proactively.

Credit unions face a multitude of risks, including credit, interest rates, liquidity, transactions, compliance, strategy, and reputation. To effectively manage these risks, boards and managers need to conduct comprehensive assessments to identify the risks that stand to have the greatest negative impact on the credit union's strategic goals.

A sound risk management plan contains certain valuable components. Boards and managers need to analyze and prioritize risks, assigning them a high or low priority based on the probability of the risk and the potential negative impact on the credit union and its members.

The board of directors plays a crucial role in establishing and maintaining a system of internal controls. They set the overall tone for the internal control environment, and their example has a trickle-down effect to management and employees.

Here are the key responsibilities of the board of directors in establishing and maintaining internal controls:

Boards also need to prioritize planning for the most significant risks to financial planning, operations, and strategic goals. This involves collaborating with management on how to prevent losses from occurring and how to recover from those losses if they do occur.

Credit unions need to establish sound risk management policies to identify, analyze, and respond to potential risks. This includes conducting comprehensive assessments to identify risks that could have the greatest negative impact on the credit union's strategic goals.

A credit union's board of directors establishes policies governing credit union operations, including risk management, which is the foundation of a sound internal control system. Sound policies address compliance with laws and regulations, authority and responsibilities, risk tolerances, and approval and reporting of policy exceptions.

A risk management plan should contain certain valuable components, including standardized assessments that take the enterprise's scope into account, and analysis and prioritization of risks. Boards and managers should collaborate on how to prevent losses from occurring and how to recover from those losses if they do occur.

Regulatory changes are on the rise, and boards need to stay abreast of these changes to ensure compliance with all applicable laws and regulations. A risk management system should include policies, processes, and controls to identify, assess, measure, monitor, manage, and report risks from its activities and the external environment.

A credit union's risk management process typically involves identifying, analyzing, and responding to risk factors in business decisions, and monitoring and proactively addressing financial risks to safeguard the institution's stability and the members' interests.

Here are some key areas of risk that credit unions face:

A credit union's supervisory committee plays a crucial role in reviewing and monitoring internal controls. They are responsible for performing or obtaining an annual audit that is independent of the board of directors and senior management.

The supervisory committee must verify membership accounts every two years and resolve any audit and exam findings. They also have the power to hire an internal auditor, if necessary, with the approval of the board of directors.

The committee is responsible for reviewing and appraising the work of internal audit staff. They must ensure that internal controls are established, effectively maintained, and are sufficient to guard against error, conflict of interest, self-dealing, and fraud.

In some states, a supervisory committee is not required, and an audit committee can serve the basic functions instead. However, FISCUs may have more restrictive audit requirements based on applicable state laws.

Here are some key responsibilities of a supervisory committee:

A credit union's board of directors establishes policies governing credit union operations. These policies are the foundation of a sound internal control system.

Well-written policies address compliance with laws and regulations, authority and responsibilities, risk tolerances, and approval and reporting of policy exceptions. NCUA regulations require credit unions to establish certain policies.

A sample of operational areas and the regulations that govern a credit union's internal control policies over that operational area includes lending, commercial lending, investments, BSA compliance, and privacy of consumer information. These regulations are outlined in sections 701.21(c)(2), 723.4, 703.3, 748.2, and Part 748, Appendix A.

Some credit unions are exempt from certain regulations, such as commercial loan policy, for more information see section 723.1(b). While regulation requires policies for select areas of operations, regulation is not the only reason to establish strong internal controls.

Policies and procedures provide direction and mitigate risk while the credit union realizes its objectives. Controls over technology are increasingly important and a credit union following best practices will integrate technology controls into its control activities and policies.

Here are some examples of operational areas and the regulations that govern a credit union's internal control policies:

In today's digital age, credit unions need to employ advanced software solutions to enhance security and ensure regulatory compliance. This includes safeguarding against potential risks with encryption and firewalls.

A credit union's data processing system produces a majority of the reports for monitoring internal controls, including file maintenance, intrusion detection, and firewall and system intrusion attempts. These reports are produced regularly and reviewed by personnel independent of the function.

Some key reports produced by the data processing system include:

Credit unions should also implement controls over systems and technology, including hard-to-guess passwords and computer access controls.

Risk Assessment and Monitoring is a crucial step in credit union risk management. It helps identify potential risks and their likelihood of occurrence, allowing you to develop effective risk management strategies.

To assess risks, ask yourself how likely they are to occur and how they will impact your credit union. This will determine the risk rating or severity of the risk. You should also consider the type of risk, distinguishing between inherent and residual risk.

Inherent risk is the risk before implementing controls, while residual risk is the risk after controls are in place. For example, the risk of a borrower defaulting on a loan is inherent before implementing controls like credit checks or collateral requirements.

Residual risk remains even after controls are in place, such as the risk of unforeseen economic downturns or personal financial issues.

To monitor risks effectively, you should prioritize ongoing monitoring and evaluation. This includes continuously assessing the effectiveness of systems and controls and identifying gaps or areas needing improvement.

Regular reporting to the board and senior management is necessary to ensure risk management remains a priority. A risk report should cover detailed information on identified risks, updates on recent risk events, and notifications on deviations from risk tolerance levels.

Here are some key components of a risk report:

By using modern solutions like board portals for financial services, you can enhance the efficiency and effectiveness of risk monitoring and reporting. This helps make informed decisions and maintain a proactive risk management approach.

Building an effective risk management plan is crucial for credit unions to safeguard their stability and members' interests. It involves identifying, analyzing, and responding to risk factors in business decisions.

A well-developed risk management plan can save valuable resources such as people, property, assets, time, and income. It also ensures that the credit union's facilities and environments are safe for staff, customers, and visitors.

To build an effective risk management plan, boards and managers need to conduct comprehensive assessments to identify the risks that stand to have the greatest negative impact on the credit union's strategic goals. These assessments should be standardized and take the enterprise's scope into account.

Risk management plans don't necessarily have to be highly sophisticated to be effective. Sound risk management plans contain certain valuable components, including identifying, analyzing, and prioritizing risks, and assigning them a high or low priority.

Boards need to prioritize planning for the most significant risks to financial planning, operations, and strategic goals. They also need to collaborate on how to prevent losses from occurring and how to recover from those losses if they do occur.

Here are the key components of a sound risk management plan:

Risk management is an ongoing process because internal and external actors are becoming more sophisticated. Boards need to monitor the effectiveness of their risk management plans and implement changes as they become necessary.

By following these tips, credit unions can build an effective risk management plan that safeguards their stability and members' interests.