Enterprise Risk Management Critical to Ensuring the Success of Credit Unions and Other Businesses
All businesses, including credit unions, face risks to achieving their overall objectives. Few spend enough time identifying these risks and developing plans to preempt or overcome them.
However, as more businesses recognize the significant impact that unforeseen events can have on their businesses, they are turning to enterprise risk management as part of their strategic business plans.
Like other businesses, credit unions are subject to a wide range of unforeseen challenges and opportunities with varying impact. As such, they stand to benefit from employing rigorous enterprise risk management solutions that involve identifying risks and opportunities, considering their potential impact, developing plans to address them, and incorporating these plans at all levels.
By doing so, credit unions can better respond to difficult-to-predict events or general financial and credit-related risks that are part of their business models.
What is Enterprise Risk Management?
Enterprise risk management is a term used to describe processes used to help organizations effectively manage risks and seize opportunities related to their goals.
While there are a number of different tools and techniques for doing so, most involve clearly laying out these goals, identifying factors that could affect the organization’s ability to achieve them, evaluating the likelihood and impact of these factors, and developing plans to address them accordingly.
Finally, effective enterprise risk management includes the development of specific actions that can be adopted across an organization to ensure that it can effectively respond to future events. These actions could include avoiding pitfalls, reducing downside risk, taking alternative actions, sharing or insuring against risk, or accepting risks.
Growing Recognition of the Importance of Enterprise Risk Management
An increasing number of companies across a range of industries recognize the importance of identifying and planning for risk. These companies are affected by a wide range of factors, some of which are exogenous to their business models and cannot be easily predicted. Credit unions are no exception and would be wise to employ a rigorous enterprise risk management strategy to help ensure their ability to achieve their objectives and succeed.
Recent high-profile failures of credit unions have brought to light the risk to the business model. Rapidly changing balance sheet structures have meant that operational strategies have changed a lot over the past decade. The increased use of outsourcing and new delivery channels have changed the business, and credit unions need to re-assess their risk factors to avoid uncertainty.
What Types of Risks Should Credit Unions Be Concerned About?
Credit unions face a number of different risks, some of which are common to other types of businesses. Many of these risks fall into several broad categories such as hazard risks from legal action, property damage, or natural disasters; financial risks associated with lending, currency, and markets; operational risks such as not achieving customer satisfaction or losing employees with critical skills; or strategic risks such as competition with other financial institutions. Data breaches are important risks to consider, as are risks concerning compliance with regulatory body statutes.
How Can Credit Unions Address These Risks?
Credit unions can address some of these risks by planning for them using an enterprise risk management approach. Such an approach generally involves establishing context by understanding the environment in which your business operates, identifying risks to its success, analyzing or quantifying those risks in terms of their likelihood and impact, prioritizing these risks, planning for them and executing a plan, and then monitoring for changes.
The most important thing about enterprise risk management for credit unions is that you’re being proactive, identifying risks to the business before they become serious threats. Enterprise risk management can permeate every level of the business, informing decisions based on the credit union’s appetite for risk.
Credit unions accumulate a large amount of data, and this information can be used to identify risks and potential opportunities. With enterprise risk management at the heart of your business, this data can be put to its best use. Risk management will also identify where the handling and storage of this data could itself be problematic.
Many credit unions will find that they can adopt a more rigorous and effective risk management strategy by hiring consultants or contractors who specifically offer enterprise risk management solutions as a service. A consultant will perform an operational risk assessment that summarizes where the company stands regarding risk and the areas that need to be addressed.
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