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New Threats Require a New Approach to Risk Management

Of all the risks your CU faces, the greatest is board complacency.

March 29, 2012
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Board oversight

Credit unions face no greater risk than complacency or lack of oversight by their boards of directors. Many failed credit unions over the past few years serve as a reminder of the importance of board-level risk oversight and corporate governance.

A truly effective risk oversight program begins with your strategic planning process. As your board of directors and senior management team begin the strategic planning process, consider how your strategic plan will align with your risk tolerance.

The five basic elements of a risk oversight program include:

  1. Identifying and defining your strategic objectives, such as growing membership by a certain percentage, increasing return on assets, implementing new loan programs, or diversifying your loan portfolio.
  2. Identifying the initiatives that will contribute to your credit union’s strategic objectives, such as new product or service offerings, additional branches, expense reduction, or new sources of noninterest income.
  3. Identifying the risks that threaten each of your initiatives, such as data breaches, fraud, credit risk, or reputation risk.
  4. Developing a viable risk-mitigation technique that will manage exposure in accordance with your predetermined risk tolerance.
  5. Recording and reporting the progress of each initiative and risk-mitigation technique to your board.

Ideally, these steps should be monitored and reported to your board on a regular basis. The effectiveness of your credit union’s risk oversight program depends largely on the board’s understanding of risks and risk-mitigation strategies.

Without adequate knowledge and resources to identify, measure, and manage threats, it’s nearly impossible to take a calculated approach to balancing risk with reward.

A comprehensive risk oversight program should be flexible, containing “safety valves” to manage risk and preserve your credit union’s ability to change course based on a wide variety of uncertainties.

Boards need a high level of regular engagement in these discussions. They should incorporate financial literacy into risk oversight as part of their overall fiduciary responsibility.

Looking ahead

In the future, exciting prospects and new challenges will require your credit union to adjust its approach to managing risk.

Litigation threats are coming from all directions, but an informed and proactive stance to these emerging trends can be your best defense.

Fines, penalties, and judgments are bad enough, but irreversible damage to your credit union’s reputation could be the ultimate price of noncompliance with important consumer protections and labor laws.

Credit unions have fared well through the recession and are well positioned to ride the wave of economic recovery.

A sharp focus on emerging opportunities and a steadfast commitment to member service-along with proper risk management-will guide your credit union through turbulent times, distinguishing it as a trusted leader in the financial services industry.

BRAD MUNDINE is senior manager, Credit Union Protection Risk Management, for CUNA Mutual Group. Contact him at 800-356-2644, ext. 5100.

Mortgage SARs on the Rise

The number of mortgage fraud suspicious activity reports (SAR) reached 19,934 during third-quarter 2011, up from 16,567 during the same period in 2010, according to the Financial Crimes Enforcement Network (FINCEN).

The most common types of suspicious activities involved loan workout or debt elimination attempts, questionable loan modification attempts by those targeting distressed homeowners, and Social Security number discrepancies.

Almost 62% of SAR filings reported in third-quarter 2011 involved suspicious activities that started four or more years ago, FINCEN reports, stemming from mortgages made at the height of the lending boom.

Mortgage fraud SAR filings have skyrocketed over the years, from 6,936 in fiscal year 2003 to 93,508 in fiscal year 2011, reports the FBI.

Resources

  1. 3si Security Systems
  2. IDAnalytics
  3. TraceSecurity
  4. Verafin

 

Board oversight

Credit unions face no greater risk than complacency or lack of oversight by their boards of directors. Many failed credit unions over the past few years serve as a reminder of the importance of board-level risk oversight and corporate governance.

A truly effective risk oversight program begins with your strategic planning process. As your board of directors and senior management team begin the strategic planning process, consider how your strategic plan will align with your risk tolerance.

The five basic elements of a risk oversight program include:

1. Identifying and defining your strategic objectives, such as growing membership by a certain percentage, increasing return on assets, implementing new loan programs, or diversifying your loan portfolio.

2. Identifying the initiatives that will contribute to your credit union’s strategic objectives, such as new product or service offerings, additional branches, expense reduction, or new sources of noninterest income.

3. Identifying the risks that threaten each of your initiatives, such as data breaches, fraud, credit risk, or reputation risk.

4. Developing a viable risk-mitigation technique that will manage exposure in accordance with your predetermined risk tolerance.

5. Recording and reporting the progress of each initiative and risk-mitigation technique to your board.

Ideally, these steps should be monitored and reported to your board on a regular basis. The effectiveness of your credit union’s risk oversight program depends largely on the board’s understanding of risks and risk-mitigation strategies.

Without adequate knowledge and resources to identify, measure, and manage threats, it’s nearly impossible to take a calculated approach to balancing risk with reward.

A comprehensive risk oversight program should be flexible, containing “safety valves” to manage risk and preserve your credit union’s ability to change course based on a wide variety of uncertainties.

Boards need a high level of regular engagement in these discussions. They should incorporate financial literacy into risk oversight as part of their overall fiduciary responsibility.

Looking ahead

In the future, exciting prospects and new challenges will require your credit union to adjust its approach to managing risk.

Litigation threats are coming from all directions, but an informed and proactive stance to these emerging trends can be your best defense.

Fines, penalties, and judgments are bad enough, but irreversible damage to your credit union’s reputation could be the ultimate price of noncompliance with important consumer protections and labor laws.

Credit unions have fared well through the recession and are well positioned to ride the wave of economic recovery.

A sharp focus on emerging opportunities and a steadfast commitment to member service-along with proper risk management-will guide your credit union through turbulent times, distinguishing it as a trusted leader in the financial services industry.

BRAD MUNDINE is senior manager, Credit Union Protection Risk Management, for CUNA Mutual Group. Contact him at
800-356-2644, ext. 5100, or at brad.mundine@cunamutual.com.

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Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

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