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CFO CURRENCY: Enterprise Risk Management: The Value Of Centralizing Risk Functions

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BY THOMAS GRISWOLD

Cybersecurity, operational, reputational, regulatory – the types of risks credit unions face these days is almost endless. The implementation of an effective enterprise risk management system, however, can aid a CU in protecting its future. Learn why ERM’s top-down holistic approach helps mitigate lost value.

At its core, enterprise risk management (ERM) is a method of centralizing the measurement and management of an institution’s overall risk. By integrating all aspects of risk, the institution ensures its strategic goals are managed in conjunction with the risk necessary to achieve them.
Traditionally, risk has been measured in silos, with individual divisions managing exposures according to pre- specified mandates. This approach can result in conflicts because risk takers are also risk managers or, at the very least, may influence risk managers. Centralization significantly limits the potential for conflicts. Further, with the risk manager reporting directly to executives, firm-wide goals can be monitored and quickly altered if the risk to achieve them becomes excessive.
The top-down, holistic approach encouraged by ERM aids management in recognizing the full scope of risks the institution faces. Today, the complexity surrounding financial depositories is ever-increasing. In traditional thought, the dominating risk factors affecting depositories were interest rate and credit risk. Although still relevant, those risks are known and, thus, easier to mitigate. Conservative loan underwriting helps prevent overexposure to credit risk, while multiple methods exist to reduce interest rate risk. ALM models and the use of interest rate derivatives help identify and defend against the adverse movement of market rates. Since credit and interest rate risks can be measured, they are much easier to control, if monitored appropriately.

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