4 Essential Questions to Ask Your Credit Union Risk Manager

Risk management, an essential component of any successful financial institution, is particularly salient for credit unions given their unique engagement with their member owners. As fiduciaries, risk managers in credit unions have a crucial role in ensuring strategic alignment with risk appetite and risk capacity. Understanding the criticality of their role, it is imperative for stakeholders to engage with these risk management professionals thoroughly and frequently. To make that engagement meaningful, stakeholders need to pose precise questions that would glean insightful information about the credit union's risk landscape. Here are four such incisive queries that can sharpen that understanding:

• How is the risk appetite defined and aligned with the credit union's strategic goals?

  Risk appetite, in the context of credit unions, refers to the level of risk that an organization is willing to accept in pursuit of its growth objectives, while ensuring member satisfaction and compliance with regulatory mandates. The alignment of risk appetite with strategic goals is a delicate balancing act that lies at the heart of risk management. As the risk landscape is dynamic, influenced by factors such as economic conditions, regulatory changes, and technological advancements, the risk appetite must be revisited frequently and realigned as necessary.

• What key risk indicators (KRIs) are in place to identify potential risks?

  KRIs are vital tools for risk identification, as they signal potential risk events before they happen, enabling proactive risk management. These could range from financial indicators such as declining loan-to-asset ratios, to operational indicators such as increasing system downtime. The choice of KRIs is determined by their ability to provide timely, meaningful, actionable insights into the credit union’s risk landscape.

• How is the risk portfolio diversified across different types and levels of risks?

  Risk diversification is a cardinal principle of risk management, based on the economic theory of portfolio diversification, which suggests that spreading investments across a wide range of assets reduces the risk of any single asset. The same principle applies to risk management in credit unions, where risks can be categorized into credit risk, market risk, operational risk, liquidity risk, reputational risk, etc. The risk manager should employ a strategic approach to diversify the risk portfolio, ensuring that no single risk dominates the portfolio and threatens the stability of the credit union.

• How does the credit union's risk management integrate with the broader enterprise risk management (ERM) framework?

  Risk management in credit unions cannot operate in a silo; it needs to be integrated with the broader ERM framework. ERM, as defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is a process designed to identify potential events that may affect the organization, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of organization objectives. The integration of the credit union's risk management with ERM is crucial to ensuring that risks are identified and managed holistically, taking into account their interdependencies and cumulate impact.

These four queries, by no means exhaustive, provide a deep dive into the thinking and strategy of your credit union's risk manager. By asking these questions, stakeholders can gain a deeper understanding of how well their credit union is poised to navigate the turbulent seas of risk, while leveraging opportunities for growth and member satisfaction. While the answers to these questions may not be simple, they provide a critical foundation for informed decision-making and strategic planning.