How to Keep the Pandemic From Spoiling Your Risk Appetite

Even for those credit unions with a formal risk management framework in place, so-called “risky” decisions can still be difficult for leaders to make. That’s because sudden, unforeseen circumstances pop up, requiring on-the-fly calls that were not accounted for within the plan.

In a pre-pandemic world, those unexpected moments were rare enough that the average credit union managed just fine with a basic risk management framework. Some credit unions got along with even less, relying on a patchwork of intermittent conversations and board votes to set the credit union’s overall risk appetite.

Then COVID-19 came along, turning those once rare, unforeseen circumstances into everyday occurrences. All of a sudden, an enterprise-wide understanding of the credit union’s risk tolerance took on an entirely new level of importance.

Revisiting Early Decisions Through a Strategic Lens

Early on in the pandemic, credit union leaders had hurried conversations around risk tolerance as they quickly mobilized to offer loan modifications and other relief programs for members. However, any guideposts staked in the ground during those early days were not likely secured by anything resembling concrete. Now, several months into the crisis, credit unions should be revisiting those early conversations. Here are the key questions:

• Are the parameters we established during COVID-19’s most chaotic days in alignment with our overall appetite for risk?
• And, what about that appetite – should we be filling up on more opportunities to help members or cutting back to preserve the cooperative’s financial health?

Board Involvement in Risk Strategy Is Paramount

Any time a credit union faces significant environmental changes, conversations around adjustments to risk tolerance should be happening, and they should be happening with the board. It’s easy to see how this can be overlooked, especially as leaders wrestle with things like equipping branches with Plexiglass and establishing new employee health and safety protocols. But, taking time out to establish a solid risk framework allows the senior staff to make quick decisions that align with the board’s overall strategic direction and risk tolerance.

Whether checking in on those early-day COVID-19 guideposts or building a risk framework from scratch, the risk assessment is another tool for credit union leaders to utilize. Update your risk assessment as a starting point during times of unexpected change. You want to identify areas that now have an increased risk. Share that updated information with the board as a foundation to a robust discussion about the board’s risk tolerance in this new environment.

As outlined in the NCUA’s Examiner’s Guide, setting the risk tolerance of the credit union is part of the strategic direction of the credit union and falls under the board’s responsibilities. The benefit of knowing the board’s risk tolerance and having regular alignment conversations in advance of emergencies allows a faster response and better support to the credit union’s members. For instance, when the federal government quickly issues an aid package that involves government funding for small businesses or foreclosure prevention measures, credit union senior leaders can quickly prepare a recommended response. That response, then, will be more appropriate to the risk tolerance and abilities of the individual credit union.

Once the risk framework is in place, credit unions should consider upping the cadence of communication between senior leaders and the board, especially during times of uncertainty. It’s one thing to create a plan; it’s quite another to deploy it. Giving board members a crystal clear view of how the strategic direction they set is impacting members is extremely valuable. It also opens the door for continued dialogue around the necessary evolution of the credit union’s overall risk appetite.

Evaluating and setting risk tolerance may seem like a low priority given the vast number of day-to-day decisions CEOs and their executive teams are being asked to make these days. However, investing in the creation of a framework will actually make those decisions much easier. When the CEO and her or his team fully understand the board’s willingness to take chances (in the ultimate name of member wellness), day-to-day choices are made faster and in full alignment with the credit union’s strategic approach to risk management.

Erin O’Hern is vice president of strategic initiatives for PolicyWorks, a provider of credit union governance, risk and compliance solutions based in West Des Moines, Iowa.