BY KENNETH M. LEVEY
Is your credit union leveraging scenario planning to its maximum potential? This tool is becoming an increasingly indispensable one for CUs in terms of both risk avoidance and growth identification. Find out which type of scenario planning is right for your financial institution and how you can put more thought into implementing it.
While scenario planning is not a new concept (asset liability models have been used for decades to help credit unions better understand the true volatility of their financials), we are seeing rapid recent adoption in its application. In a recent survey conducted by Axiom EPM, nearly 30 percent of financial institutions state that they regularly process and present alternative financial scenarios, representing a jump from just 19 percent one year ago.
Scenario planning helps credit unions better manage uncertainty by providing alternative views of the future against which proposed strategies, tactics and budgets can then be tested. When done well, scenario planning becomes a valuable tool– not just for avoiding risk but for identifying and seizing growth opportunities– whether it involves a simple sensitivity analysis approach or a more formalized, storyline-based scenario.
Types of Scenario Planning
There are four primary types of scenario planning most commonly used by credit unions today:
Single-variable sensitivity analysis changes one variable at a time while holding the others constant to quantify the impact of that singular change. This approach is a great starting point, as it is generally the easiest to model but still helps credit unions identify which drivers or model inputs will have the most impact on the institution. While this approach is sometimes criticized for its simplicity, it is still incredibly helpful to call attention to how a single change in an underlying driver variable can impact the credit union.