Will an erratic election year affect your credit union?

Financial institutions focus on the future by planning, forecasting, considering customer delivery preferences and assessing risks before they occur. Good thing … America is in the midst of the 2016 election cycle, and your credit union should be planning now for possible exposure to a risk that’s lesser known and not often discussed—political risk.

Political risk refers to the adverse effects that could arise from political or governmental changes, including changes with policy makers, legislators and other elected officials. In such a turbulent election year as this, risk and strategic planning are critical.

Political risk has a direct correlation to your institution, and it goes further than individual federal agency or party affiliation; decisions made by the government can affect your operations and performance.

I use the word “correlation” intentionally because it is familiar and also emphasizes something regulators ask you to consider today in your planning. They look for the correlation between the markets you serve and the employers in your trade area, as well as how outside influences might affect institutional performance and create risk.

Successful mitigation of political risk requires deploying a forward-looking risk management effort emphasizing engagement with local, state and national government representatives. The following best practices offer direction:

Identify the Risks

It helps to separate political risk from regulatory compliance. While concentrating on compliance is a must, also accept the importance of working to influence legislation/regulations from their inception. If you can positively affect the legislation on the front end, it will make your compliance with that regulation much easier on the back end.

Assign Responsibility, Engage Your Board and Become Involved

Mitigating political risk is a marathon, not a sprint, and it requires team effort—with less burden and lower costs as the result of this effort. Given its importance, someone high up in the food chain needs to take on the overall responsibility. You can also engage your senior management team to draw on their expertise.

Your board must also be involved, as regulators consistently emphasize that boards be “informed and engaged” in risk management. And while you need to enlist the support of others and consistently keep the board looped-in to risk mitigation efforts, as a senior executive, you need to spearhead the effort as the person most familiar with your credit union’s culture and all the risks it faces.

When providing valuable input to legislators and regulators, the information you share should consist of how you believe a law, rule or regulation that’s being considered will help or hurt your credit union and your ability to serve your surrounding community.

Incorporate Political Risk into Your Strategic Plan

Your management and board undertake exercises to identify strengths, weaknesses, opportunities and threats to the institution as they relate to the strategic plan. The question is, were government legislation and regulation considered or included as a “threat?” On the flip side, while the majority of institutions constantly identify compliance as a threat, they rarely mention their ability to influence these legislative or regulatory proposals through direct contact as an “opportunity.”

Understand that the Regulators Agree

In a recent presentation I gave to more than 100 institutions on ERM and the integration of risk efforts into risk management and strategic planning, several examiners were actually in the audience. I kept going back to them throughout the discussion to verify both the content and the premise of their regulations and guidance. And my interpretation of the content is that regulators are placing a heavy emphasis on business plans and the identification of the risks inherent in them. Notably, my analysis was confirmed repeatedly by this unofficial supervisory group.

Further, I brought up the potential for political risk to influence strategy. The response from the room was that governmental action can absolutely be a risk. While the regulators wouldn’t identify themselves as a threat—I didn’t expect them to—their meaning was clear: government actions should be considered in strategic planning.

Additional Insight

While I have referred to political risk throughout this article, let me reiterate, this isn’t just about politics. It’s about promoting, defending, defining and implementing your strategic plan and mitigating the risks associated with it. There are outside influences that you must consider in order to accomplish that task, including the influence of politics and government actions.

Remember, there is no reason to take this task on alone, because you have valuable resources that can help. Use your membership in your state or regional credit union league as a starting point. But it isn’t enough to simply join—get involved.

There is strength in numbers. Be heard.