Catalyst News

Effective Risk Taking 101

by Catalyst Corporate | Jun 11, 2019

No, this isn’t a topic solely for adrenaline junkies, thrill seekers and the just plain lucky. Risk Governance is a critical component of every credit union’s asset liability management strategy.  In fact, it’s a term most board members and senior management hear often.

“Implementing an effective approach to risk taking doesn’t have to be complex – it starts with a strong understanding of the core competencies that help credit unions develop a custom, targeted strategy,” said Steven Houle, Catalyst Strategic Solutions Vice President of Advisory Services.

Houle outlined strategies for achieving effective risk taking when he spoke at the 25th Annual CUNA Finance Council Conference late last month. Every year, more than 500 credit union professionals from across the country come together to discuss the latest financial issues, trends and topics at the CUNA Finance Council’s three-day summit.

When it comes to effective risk taking, Houle starts with the basics: risk governance vs. corporate governance.

Corporate governance refers to structures and processes for the direction and control of a company. Risk governance is a relatively new term that describes the ways in which directors authorize, optimize and monitor risk taking in an organization. It provides clearly defined accountability, authority and communication/reporting mechanisms.

“It is also critical to understand the types of risk credit unions face,” Houle pointed out. He lists these as:

  • Financial Risk
  • Operational Risk
  • Strategic Risk
  • Hazard Risk

In addition to a firm understanding of the various types of risk, Houle touches on the importance of risk communication. The concept of risk communication can be broken down into four essential components:

  1. Defined risk governance roles
  2. Shared view of risk
  3. Concise risk appetite
  4. Focused risk reporting and dialogue

Defined risk governance roles.

Houle sums up governance roles with one, simple question, “Who needs to know what, and when do they need to act?” The Board provides oversight and ensures management identifies, assesses and responds to risk, while Senior Management develops and executes activities including the management of enterprise risk.

Shared view of risk.

“Board and management must have a shared understanding of ‘risk.’ This can be defined as factors that could impact earnings, the market value of the balance sheet or the overall growth strategy of the credit union,” Houle said.

Concise risk appetite.

Risk appetite establishes the amount of risk an organization is willing to accept. In order to determine your credit union’s risk appetite, Houle outlines these five key principles:

  1. Guides in strategy setting
  2. Guides resource allocations
  3. Aligns organization, people, processes and infrastructure
  4. Reflects the entity’s risk management philosophy
  5. Considered in strategy setting so strategy and risk align

Focused risk reporting and dialogue.

Risk reporting addresses key risks, aligns information appropriately and provides longitudinal perspective. It should be consistent, but also updated at a frequency consistent with the pace of risk evolution and severity of risk.

“It’s not simply ‘paperwork,’ but information that supports effective dialogue,” Houle added.

All in all, the core competencies of effective risk taking are designed to help credit unions weigh risk, evaluate opportunities and implement a consistent, operational approach.

The advisors at Catalyst Strategic Solutions offer an extensive wealth of knowledge on a wide range of credit union services. As a wholly-owned subsidiary of Catalyst Corporate Federal Credit Union, Catalyst Strategic Solutions, LLC, combines 30 years of experience with a cooperative business model to provide balance sheet guidance to credit unions nationwide.

To find out more, email contactis@catalystcorp.org or call 800.301.6196.