BY ALEC HOLLIS
Financial professionalsat times may have a “check the box” attitude toward risk management. Sometimes viewed as a necessary evil, risk management activities may have a perception of detracting from institutional profitability. While it is certainly possible to overregulate, proper risk management remains a timeless element to long-run profitability.
Particularly in relation to interest-rate risk, some credit unionshave more tolerance than others, begging the question, “does assuming more interest-rate risk lead to higher returns?” While on the one hand, risk avoidance can certainly lead to falling short of profitability goals (the quote, “don’t manage your interest-rate risk using your members” comes to mind), excessive interest-rate riskcan also put a credit unioninto a squeeze should the market move unfavorably.
Predicting interest rates is a generally tough game; many “experts” don’t get it right. The job of the asset/liability management (ALM) function is to protect the viability of the credit union’sbusiness model by reducing the inherent risks of financial intermediation, allowing forscalability and growth in a safe and sound manner.
The goal isn’t to minimize risk; rather, the focus should be on quantifying risk, such that it can be managed. Ultimately, this helps ensure the institution generates adequate reward per unit of risk, irrespective of interest rates or competition. High-performing institutionsoften integrate therisk management and strategic planning functions as they continue to develop new and existing products, services, and processes. And, when risk becomes increasingly elevated, effective communication is key.
Today, an effective risk management process requires an important investment in technology. Data delivery for use in strategy and risk management must be done seamlessly and efficiently, so as to allow management the time and credibility to make important business decisions. Especially for smaller credit unions, this can often be a tough hurdle to overcome. Smaller credit unionsin some cases have had a harder time keeping up with the evolving demands for financial services, particularly with innovations in product capabilities and memberexperience.