Have you ever been on the verge of doing something big and then found yourself unable to move forward because of the fear of possible negative consequences? If so, you’re not alone. Most people are wired to avoid fearful circumstances, and taking risks certainly falls into this category. Risk-taking is scary and leads to unknown consequences. While there’s a reasonable probability that you’ll receive the result you desire, there’s often an equal or greater likelihood that you’ll end up with an adverse outcome. It’s this fear of the unknown that holds people in limbo and keeps them from taking chances, even when the payoff for taking action is substantial.
Credit Unions are Risk-Averse
Credit unions often fall into this “risk-averse” category. Because financial institutions deal with people’s life savings, an overall feeling that “it’s better to play it safe” prevails. Managers are often trained – and encouraged – to take this approach to running the organization, but this mindset leads them to spend much of their time looking for potentially negative scenarios that could impact the organization. They then spend even more time looking for ways to avoid the danger. The mantra has been, “Minimize risks, maximize revenues. Keep your eyes open, watch for danger, and don’t take unnecessary chances.” Proving fiscal responsibility is crucial, and avoiding risks at all costs falls right in line with this way of thinking.
But trying to keep the reins on a situation that’s uncontrollable feels like an exercise in futility. What if, instead of trying to control the inevitable, managers instead looked for ways to use the situation to the credit union’s advantage? What if those seemingly dangerous situations were the opportunities the organization needed to propel it to the head of the pack? Or at the very least, to solid financial results and enhanced member value?
Risk Management vs. Risk Taking
Too often credit unions are faced with situations that require independent thinking and proactivity to accomplish positive results. For many credit unions, these situations in the past have meant avoiding action by falling back on policy, thereby leading to dissatisfaction among all constituents. Employing a risk-taking mindset opens many more possibilities for growth and facilitation of wants and requirements. As one executive put it in an article in Risk Management Magazine: “The role of risk management is to define what is needed to approve a certain type of loan or deal, not to always be the bad credit guy declining deals.” This is a very different approach to risk management than has been embraced in the past.
Credit unions have traditionally put their focus on risk-averse management – the act of identifying risks and creating a plan for mitigation or avoidance. But there’s benefit in giving thought to a different approach, one geared more toward intelligent risk-taking rather than risk-avoidance.
Credit unions must recognize that they are in the business of risk-taking. They are financial intermediaries, meaning that they intermediate risk on behalf of their members that the members cannot or will not assume themselves. If we aren’t doing that, we’re of no value to our members. The risk management function should position itself not as a “department of no,” but a “department of how.”
Risk Management: Still a Good Strategy
Many credit unions incorporate risk management strategies into their enterprise risk management (ERM) programs with the intent of not only identifying potential risks to the institution but also avoiding said risks. Having a plan in place to identify, mitigate, or avoid risks is beneficial because it provides a plan of action when specific situations arise. Often these plans go deeper, aligning and integrating with acceptable levels of risk within the organization as determined by risk appetite surveys and reporting. This facilitates easier decision-making because a roadmap has been laid out, removing any guesswork or individual biases. When X happens, Y is the solution.
Maintaining a solid strategy for identifying and mitigating risks associated with the operations of the organization proves fiscal responsibility, and is a trait that management, supervisory committee members, board members, and regulators like to see. But occasionally the risks the organization has worked so hard to avoid turn out to be the very opportunities that could have propelled the institution to financial success if handled differently. This is why taking a different approach makes sense.
If you take a closer look at the term “risk management,” you’ll see a challenge that’s nearly insurmountable. The idea that risk can be controlled is a fallacy; risk, by its very nature, is unpredictable. What’s implied by the term risk management is the act of attempting to manage possibilities and outcomes; attempting to avoid, change, or in some way impact a specific situation to minimize damage. Credit unions go to great lengths to create risk management strategies to protect the assets of the organization from negative consequences. This is still considered a smart business practice.
Strategic Risk-Taking: A New Approach
Instead of solely adopting a risk-management (aka risk-avoidance) mindset, credit unions would do well to instead switch their focus to a more proactive risk-taking approach. While efforts at risk-avoidance measures are often effective, credit unions that adopt a risk-taking mindset may find themselves further ahead than their peers for the simple reason that they were bold enough to embrace a potentially harmful situation and use it to their advantage. Instead of spending time preparing for the worst-case scenario, they focus on ensuring the best possible outcome. This opens doors to new possibilities for success that might otherwise have been missed entirely.
Alexei Sidorenko, a change agent for risk management, puts it this way: “The most ironic part about risk management is that risk management is actually not about managing risks, it’s about making decisions with risks in mind. Big difference.”
Incorporating a Risk-Taking Attitude
The successful manipulation and application of risk scenarios are best achieved by gathering as much intelligence around both internal and external risks (e.g., uncertainties) as possible and then analyzing the data to determine what opportunities may exist within each condition. Posing the question, “Is there any benefit to be gained through this specific event?” starts the thinking process going in a new direction. Rather than focusing on risk avoidance, the focus shifts to risk-taking and risk-embracing, very different ways of examining things. One other way to ensure the right information is being discussed is asking “What might happen” instead of only focusing on “what could go wrong”.
Credit unions that take this approach to risk will find that it’s not as scary as anticipated, especially when risk appetite and risk tolerance are factored into the equation. It’s a balancing game. When presented with a situation that could result in significant gains for the credit union, where risk appetite and risk tolerance are also reasonably high, the risk seems somewhat more manageable and worth taking. Deciding to move forward after examining the upside of risk may well result in a more favorable outcome.
Credit unions that engage in a risk-taking approach to uncertain conditions, giving thoughtful consideration to using them to their advantage, are the credit unions that will achieve strategic and financial success well into the future, and ensure they are optimizing value to the membership for years to come. For more information on how your credit union can adopt this approach to risk, contact Rochdale Paragon Group.