Enterprise Risk Management (ERM) is something credit unions have been wrestling with for a number of years. For many cooperatives, the notion of ERM was first introduced by Board and Supervisory Committee members recruited from sponsor companies or outside industries.
As more and more of these volunteers began touting risk management and its potential for the financial industry, many credit unions found themselves incorporating ERM philosophies and best practices into their own business model. Regulators, consultants, and software vendors that provide ERM solutions also did their part to promote awareness, for obvious reasons.
More recent external factors have also contributed to a heightened focus on risk, including regulations and standards surrounding corporate governance, compliance, and risk management. Credit unions are collectively spending millions of dollars in response to these pressures, while executive management and Board members are contending with greater expectations regarding oversight of key business risks.
ERM provides insight into a credit union’s risk profile and its overall level of risk management coverage and competency. With so much at stake, many credit unions are tempted to create, or heavily invest in, a new infrastructure to handle risk management. However, for most credit unions it is more practical to leverage existing infrastructure than to undergo a massive organizational restructuring.
This approach is more likely to produce early success, demonstrate the benefits of risk management, and increase the chance for broader acceptance and support of future risk-focused initiatives.
It is important for the design and implementation of ERM to be both practical and comprehensive. This includes creating a risk management platform that not only mitigates the impact of risk but also supports growth and efficiency. Risk management should be viewed as a competency that is deeply embedded in the organization.
It is hard to gauge how much of an investment is enough with ERM. Credit unions can invest as little as $20k or as much as $300k in annual or bi-annual expenditures. They can also choose to outsource this function or buy software to tackle these challenges internally. However, those that choose the latter should be aware that this is a never-ending live project.
These credit unions will have to assign a staff person to populate the program with relevant specific information about the institution. And as risks evolve and offerings gain more visibility ─ due to changes in the economy, technology, or the products and services offered ─ the credit union will need to revisit the program every three months to make adjustments.
Some of the benefits of an effective ERM program include:
Reducing costs incurred by managing volatility,
Creating a consistent method for assessing and understanding risk
Developing new ERM programs with common language and objectives
Focusing management’s attention on risks that are important to the credit union’s objectives and strategy
Protecting and enhancing the credit union’s net worth
A big part of ERM is the risk assessment, which entails an identification and assessment of all of the credit union’s products and services and an assignment of multiple risk factors. The risk factors will vary depending on which firm is conducting the risk assessment or which software the credit union uses. For example, one firm’s practice might be focused on producing value from organizations’ investment in risk management. Another firm might assist clients by integrating risk management activities with the strategic business plan. Some firms will use a formula driven by as many as fifteen risk factors.
One targeted approach to risk management includes:
The end result is that each item in the credit union’s universe of products and services will have a risk factor. The list then can be sorted from highest risk to lowest risk and used by the credit union to determine where to place more controls and where to deploy more audit resources.
In all, this process will assist credit unions in establishing a more efficient governance structure that is also more accurate, reliable, and cost-effective. The intent of risk integration is to enable an organization to drive value, reduce costs, and mitigate risk through the execution of its risk management activities.
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