Today’s regulatory environment has become much more stringent when it comes to the safety and efficacy of day-to-day operational practices and procedures in the credit union industry. In years past, reporting and regulatory requirements were pretty basic. Now, credit unions are being held accountable to a much higher level of visibility into everyday operations, creating an environment of stress and uncertainty that’s not conducive to effective business management.
Savvy credit unions are starting to implement risk management tools and systems to help guide their organization through the never-ending regulatory and reporting maze. Not only do these tools help credit unions stay in compliance and manage to current regulatory requirements; risk assessment tools can also be used to provide guidance throughout the organization when it comes to making sound decisions that have long-lasting impacts on business.
Operational Risk Permeates the Organization
Operational risk comes in many shapes and sizes. It can come in the form of failed financial transactions, poor decision-making by employees, systems and technology issues, or external factors that are beyond the credit union’s control. There is a plethora of situations that may negatively impact the ability of a financial institution to deliver products and services adequately, make sound decisions, manage information flow throughout the institution, and remain competitive. Operational risk assessment tools for credit unions such as risk calculators, risk assessment templates, and risk management software help mitigate these risks and provide management and board members with the information needed to run a successful, profitable, and sustainable operation.
Basic regulatory compliance is a major issue facing credit unions today. Regulators now ask for a wide range of risk assessments – including regulatory (BSA, OFAC, etc.), process or product (wire, ACH, RDC, etc.), or project-related assessments. As the credit union industry gets ever more sophisticated, regulators are taking a deeper dive into all operational aspects of the institution. This leads to the need for thorough documentation of risk-based decisions and solid proof that decisions are not being made in a vacuum. Rather, they’re being made with full fiduciary responsibility at the forefront and in an environment of proactive risk identification, assessment, and mitigation.
Day-to-Day Operational Challenges
There are challenges other than basic regulatory compliance that credit unions face on any given day. They may find regulators questioning the proactivity of the institution’s involvement in completing and updating risk assessments. They may be asked for risk assessments that can be rolled up into overarching ERM systems or they may be asked to build an action plan for mitigation in instances where residual risk falls outside the board-approved risk appetite. Each of these scenarios, in and of itself, is reason to have a solid operational risk assessment program in place; but when combined, these situations point out a critical need: the need to be proactive and create risk-based guidelines across all departments, as well as enhanced visibility into the operational decision-making process at all levels of the organization.
Risk assessment and operational risk management are often associated with basic regulatory compliance, but these tools do not have to be used exclusively for that purpose. Operational risk management tools for credit unions are designed to enable these organizations to get a bird’s-eye view of how their risks fit within the overall appetite for risk as well the level of risk tolerance within the organization. Additionally, many operational risk assessment systems integrate into the institution’s larger enterprise risk management (ERM) system, feeding data to upper executives that provides them with a snapshot of the risk-related health of the institution at any given time. This data then comes into play during key strategy talks and high-level decision-making meetings, allowing the credit union to make decisions in a timely manner and within previously-established parameters of institutional risk tolerance.
Proactive is Better than Reactive
Another challenge that many credit unions face is being asked for risk assessments after an event takes place, i.e., after a product launch, regulatory examination, etc. In this case, the results of the risk assessment are tainted by the event that has already occurred, so a clear and unbiased picture of the situation is not possible. Again, this points to the need for proactive assessments on a regular basis. By taking a proactive stance with operational risk management, the organization is assured that it has a clear picture of the risks associated with doing business in all areas of the organization; and management has the confidence that they can provide data and reporting to the board or regulators on any negative incident that may occur.
Putting the Data to Work
Credit unions that take a proactive stance, conduct operational risk assessments, and then let the data languish in the system without disseminating it throughout the organization do themselves a grave disservice. Conducting an operational risk assessment and then doing nothing with the information is time and money wasted. The data that was gathered could be helping to guide the organization to a more competitive stance in the marketplace. Credit unions that take the data from operational risk assessments, analyze it, use it to create risk mitigation guidelines, and then use those guidelines in decision-making exercises throughout the organization are light years ahead of the competition.
Proactive Risk Management Starts on the Inside
Operational risk assessment for credit unions starts with an awareness of the need for risk management. Rochdale Paragon Group works with credit unions across the country to examine each aspect of an organization’s operational processes, procedures, and policies to determine where the organization may be open to threats. An operational risk assessment takes a snapshot of where each risk falls within the overall appetite for risk within the organization and highlights areas that need to be addressed. A risk strategy is then developed that includes key risk indicators (KRIs) that alert management and board members to potential threats and vulnerabilities, and validate that the institution is operating within its risk appetite. Ongoing assessment, maintenance, and feedback provide an operating structure that allows for growth, competitiveness, efficiency, and profitability.
To learn more about how we can help your credit union develop a solid operational risk assessment and management plan, contact Rochdale Paragon Group today.