By. Tony Ferris, Managing Partner, The Rochdale Group
As the fragile state of today’s economy proves to be enduring, more credit unions are putting serious thought into the assessment of their organizations’ risk levels. It’s a reasonable reaction to embrace. After all, it was unmanaged risk and oblivious decision-making that caused the failure of many businesses as our last economic crisis struck. In an already weakened economy, one can’t be too careful about the choices their organization makes.
Enterprise risk management (ERM) has received a lot of attention as organizations seek out risk assessment processes. Addressing the concerns of growth potential, regulatory compliance, balancing strategic risk, avoiding unwanted surprises and staying competitive, ERM is designed to produce peace-of-mind and stability for a company’s foreseeable future. Doug Ferraro, CEO of Bellco Credit Union in Colorado, has been employing ERM for more than four years. “In and of itself, the first process of measuring existing risks and calculating what those mean – that exercise is worth it to open your eyes to make sure you know what your organization looks like,” states Ferraro. “It’s a one-time opportunity to understand what you didn’t.”
However, the misconception that is already being embraced is that putting a superficial investment of time and effort into a one-shot risk assessment is sufficient protection from risk for the foreseeable future. An assessment will tell you what’s safe about your current endeavors, the risks of your potential plans, and the changes that will decrease that risk, but the process should not be treated as a yearly physical where you make a few changes and move on blindly from there, assuming yourself to be risk-free. Risk assessment and management only truly become useful and cost-effective when incorporated into an organization as a long term cultural and strategic investment. “If you don’t see it as a valuable, living and breathing process that’s going to be a part of management decision making, it’s going to be a waste,” says Ferraro.
When implemented correctly, ERM provides risk management input for every major decision from interest rate and account transaction risk to loan losses and fraud – any choice that has a chance of costing money. Earl Young, CRO of Desert Schools FCU, confirms that “ERM is a fundamental component for all the things our line of business does. It’s a component that needs to be there throughout.”
Many hesitant credit unions’ main concern is the cost of implementing ERM, but since taking on ERM as a risk management tool, Bellco Credit Union has seen a decrease in delinquency and a sizeable increase in profitability. Despite the current economy, they see a 6% return on loans and can claim a 3.9% net interest rate margin. Ferraro attributes some of that success to ERM: “We know better where to accept risk and its generating profitability – our loan losses are a fraction of what they used to be.”
“I think there’s a greater cost in not doing it,” was Young’s response to the cost concern. “The cost of not having a disciplined approach to management of risk is far more potentially deadly than the cost of having an ERM program. ERM is not the goal but it must be a real and meaningful building block to every goal in the organization. It’s a critical means to an end, but not an end.”