NEW ORLEANS—Two credit unions that have installed enterprise risk management solutions say the benefits they have seen go far beyond quantifying dollars at risk and extend to issues that include process improvements and better future scenario planning.
During the CUNA CFO Council meeting here, two CFOs shared their experiences with ERM in a discussion that was moderated by Brian Hague, senior consultant with the Rochdale Group. Joining Hague in the discussion was Steve Arbaugh, CFO at SECU of Maryland, and Danny Davidson, CFO at the $419-million Alliance Catholic Credit Union, Southfield, Mich. Both credit unions use Rochdale Group’s ERM solution.
Steve Arbaugh left, and Danny Davidson speaking to CUNA CFO Council conference.
Arbaugh said that although his credit union has $3-billion in assets, the issues it faces in managing risk aren’t any different than those facing CUs of other asset sizes, as every CU and CFO is facing risk from decreased overdraft fee income, issues around member data security, etc.
Ferris echoed the point, observing that whether a CU has $10 million or $10-billion in assets, “You need a reoccurring methodology. That’s what it’s all about, even if it’s on the back of a napkin. In some cases there is an even bigger risk at smaller CUs, because they have so many people who wear so many different hats.”
650 Risks Identified
With its ERM solution in place, Arbaugh said SECU identified 26 different functional areas within its organization, and then 650 different risks associated with those areas, including everything from credit risk to IRR to what happens if the branch manager doesn’t lock the door at the end of the day.
“Throughout this process I can’t tell you how often in meetings and talking about what we do on a day-to-day basis we developed a lot of efficiencies and process improvements,” he said. SECU has since developed a committee that makes up its Office of Strategic Management, which he said has also made regulators happy.
SECU’s self analysis has identified total risk of about $55-million; as a result it seeks to manage to a minimum capital ratio of 8.89% (7% plus 189 basis points for ERM). It currently operates with a capital ratio in the 9% to 10% range.
At Alliance Catholic FCU, Davidson said the ERM process and all related data have been put in front of every business unit so it can be updated constantly and understood. “It’s always there in front of us,” said Davidson. “The idea is to have everyone thinking about it, not keeping it in the backs of our minds.”
Arbaugh noted that at times when people think of ERM they become “flustered” at what can seem to be an overwhelming analysis. “But I can almost guarantee you that you are doing all of these things already. What (ERM) allows you to do is get it all under one umbrella and put a dollar value on it. The biggest value we have found is having a measurement system to put all these risks and probabilities into one central location. I’m not too worried about IRR; we’re more concerned about risks that out there in front of us in the future, such as risks to overdraft fee income, in order to reduce surprises.”
Other Issues Smaller, But...
He said its ERM process has even taken into account smaller issues such as the fact there are nine other SECUs in the country, and there is potential for reputation damage or misunderstanding by members should something negative happen at one of those institutions. For that reason it has put communications plans in place.
Both Arbaugh and Davidson agreed that what a formal ERM system has done inside both their credit unions is force them to recognize the breadth of risks to their organizations. Although ERM is often viewed in financial terms, at Alliance Catholic, the ERM process has included discussion of attracting and retaining talent to the credit union, noted Davidson.