Would You Bet Your Life On it?
The award-winning biographical film, Free Solo, released in September 2018, documents one man’s attempt to climb El Capitan. Alex Honnold, an elite climber from Sacramento, CA, had a lifelong dream of climbing El Capitan “free solo,” the term used in the climbing world for climbing with no partner and no ropes, a feat that very few climbers attempt. On June 3, 2017, he successfully made the climb, becoming the first person ever to free solo on El Capitan.
His climb was fraught with risk. El Capitan, located in Yosemite National Park, is one of the world’s most iconic rock formations. Feared and revered by climbers around the world for its sheer face and 3,000-foot vertical scale, El Capitan has claimed the lives of several seasoned climbers in spite of their use of sanctioned climbing equipment, including two elite climbers who fell to their deaths last June. Alex Honnold was well aware of the risks he faced as he attempted his free solo climb. He kept a notebook in which he documented every detail of every practice climb he made in preparation for the event. He knew every pitch on the rock like the back of his hand, and he knew that each finger and toe had to be placed precisely every single time. His life depended on it.
Are the Rewards Worth the Risk?
Alex Honnold spent much of his time assessing the risks associated with his climbing attempt and decided that the successful accomplishment of a lifelong dream was worth taking those decidedly daunting risks. One could say that Alex Honnold has a very high appetite for risk. Credit unions can learn a thing or two from Alex Honnold. They, too, should assess risk appetite to ensure that any strategic risks being taken are worth it in the long run. Without taking time for this crucial step in the planning process, credit unions may find themselves wandering off course. Or worse yet, falling to their demise.
Assessing Risk Appetite Helps Organizations Stay on Course
Having a plan in place for identifying, avoiding, mitigating, or balancing risks is crucial to an organization’s success. But the process of harnessing this amorphous intelligence to create a plan of action often leaves credit unions scratching their heads. Where to start? Experts at Rochdale Paragon Group suggest starting with a risk appetite assessment survey. Risk appetite assessment surveys are designed to dig into the inner workings of the organization to determine what levels of risk are not only acceptable but also comfortable for those in charge of running the operation. When leaders are out of alignment in this one area, the organization often experiences tension as managers in different departments make decisions based on individual personalities and levels of comfort – decisions that conflict with those being made by others or fly in direct opposition to the goals of the organization. Risk assessment surveys help credit unions get their arms around this issue by querying those individuals directly involved in the decision-making process to discover the amount of risk they’re comfortable in taking on to accomplish the credit union’s strategic goals.
Risk appetite assessment surveys also help the board and management align on the credit union’s willingness to assume different types of risk. Good governance requires that the board and management find consensus, and seeing how executives and board members align with respect to risk appetite is valuable intelligence for any organization. The key word is consensus – it’s not necessary that every member of the board or management team has the same view regarding risk; different perspectives are valuable, and group-think makes for weak teams. What’s important is that, at the end of the process, both groups are able to reach consensus, and the outliers don’t try to re-litigate the process at a later time.
A Balancing Act
Once risk appetite is determined, the credit union can disseminate this information throughout the organization, providing managers with “curbs” that essentially guide the way for better decision making and helping organizations stay within the lines on the road to success. Financial and strategic goals and performance can now be measured against risk appetite statements and risktolerance metrics to see where adjustments need to be made. The more aggressive the goals of the organization, the more likely the probability of higher associated risk. This leads to a risk balancing strategy. Similar to Alex’s climb, risks and rewards within a credit union must be weighed and balanced out to achieve the desired outcome.
Assessing Risk Opens New Possibilities
Let’s look at an example. A credit union with a below-average charge-off ratio is looking to grow revenues more aggressively. In the past, this credit union has played it safe by focusing efforts on maintaining the current rate of charge-offs; and it has ignored its members’ needs for additional lending due to the added risk involved in expanding loan services. Assessing risk appetite in this scenario is particularly useful because it brings to light the current acceptance of risk within both the management and the board. It may turn out that neither group is as risk-averse as was previously thought, meaning that this organization may be operating well below acceptable risk tolerance levels, thereby unnecessarily leaving money on the table. In this scenario, the credit union may want to implement a strategy of setting upper and lower risk tolerance levels for charge-offs. While this strategy comes with greater risk, it’s also balanced against the organization’s true risk appetite, which allows the institution to grow and better serve its members while still maintaining a safe distance from identified risks.
Assessing Risk Also Confirms that You’re on Track
Going through the process of determining your organization’s appetite for risk may yield other results. It may well confirm that your organization is moving in the right direction.
Knowing this gives management, the board, and the supervisory committee confidence that the credit union is being managed responsibly and without undue risk. An example might be a credit union that wants to validate that their current stance on liquidity is appropriate. Comparing the liquidity management strategy to results from a risk appetite assessment survey highlights any gaps in comfort levels that may exist. If it turns out that the organization’s position on liquidity marries up with its appetite for liquidity risk, everyone involved has confidence that the credit union is on the right track.
Know Where You Stand
Risk appetite assessments provide a wealth of information to help guide your organization to success. Aligning known or perceived risks with risk appetite levels highlights opportunities to make changes that might otherwise be missed – changes which may contribute to a stronger organization. Without this insight, organizations may languish. Conversely, the comparison of current practices with survey results may point out areas where you’re set for success. Just as Alex Honnold took time to assess the risks inherent in climbing El Capitan before setting foot on the rock, credit unions should also take time to evaluate the risks associated with their own ascent. The life of the organization depends on it.
For more information on assessing risk appetite, contact Rochdale Paragon Group.