Find Your Hunger: Establishing Your Credit Union’s Risk Appetite

Hunger is a phenomenon we all experience, but it’s different for everyone. While some people wake up absolutely famished and ready for breakfast, others can get away with just a few small bites here and there until lunchtime. The key to resisting hunger is to know your appetite.

The same can be said of businesses and risk. There is risk in everything, and it’s part of any organization’s strategy to successfully manage those risks. But, as with hunger, each organization – such as your credit union – must determine its own level of acceptable risk. That is what we in the risk management world refer to as risk appetite.

What is Risk Appetite?

Officially speaking, risk appetite is the amount of risk an organization is willing to accept as part of their strategies for doing business. It takes into consideration your credit union’s core values, policies and strategies, member needs and risk capacity (or how much risk the organization can absorb while still maintaining a level of success).

What that means to your credit union, however, is up to you. Maybe your institution is willing to take on more financial risk from investments than another area such as loans, or maybe it’s not. Your risk appetite is designated by a spectrum, with the lower end representing the least amount of risk your credit union is willing to take on and the higher end representing the maximum amount of risk.

A huge factor in determining your risk appetite is getting buy-in from your management and board. These are the people who govern the goals of the organization and understand how everything is related. They will be the ones who ultimately set the tone for the credit union’s risk appetite, based on multiple items including:

• Risk profile – Identify the most prominent risks to your credit union and mitigations for those risks. Use this information to come up with policies and procedures that support your risk appetite.
• Risk target – Establish your ideal level of risk specific to your goals in a variety of areas including compliance, operations, reputation, etc.
• Risk capacity – Determine how much risk your credit union can withstand while still meeting strategic objectives.
• Risk assessments – Perform analysis that takes into account both quality and quantity of risks so you can best prioritize and categorize risk, establish controls and set hard limits on amounts related to risks.
• Risk limit – Limits are determined based on actual risk exposure. They are set to ensure the exposure does not deviate too much from the risk target and stays within your credit union’s risk appetite spectrum. If the limits are exceeded, management will likely need to step in and take action, which can be laid out in the policies and procedures that stem from the risk appetite implementation.
• Risk tolerance – The maximum amount of risk your credit union will support in its operations to achieve its goals. This is NOT interchangeable with risk appetite, as it shows the point of most resistance – the line that decisionmakers should not cross to remain within the set risk appetite spectrum.

Why is Risk Appetite Important?

It’s easy to think that a risk appetite is a good idea, but then put it on the back burner. However, it’s so much more important to your credit union’s success than you might think and making it a priority is only going to benefit your credit union. Here’s why…

A risk appetite statement – a generalized declaration of your risk boundaries – lets members and vendors know that you take risk seriously and have steps in place to prevent hardships brought on by risk. In this sense, it goes a long way in promoting your reputation as a responsible organization.

Internally, though, your risk appetite is a roadmap for how to proceed when it comes to making decisions. There should be a series of policies that provide specific guidelines for what risks are acceptable and unacceptable, allowing management and the board of directors to make informed decisions that will impact finances to vendors and everything in between. This also prevents team members from making decisions that are overly conservative or beyond the maximum risk the credit union is able to handle.

Yes, A Risk Appetite is Just What Your Credit Union Needs!

Risk, like hunger, is universal. It’s inevitable for your credit union. Dealing with risk on a case-by-case basis just won’t cut it. What you need is to find your hunger. In other words, determine a clear and defined risk appetite, which will become a crucial part of your internal enterprise risk management process. After all, nobody wants to be risk “hangry.” Instead, satisfy your risk appetite by knowing where your organization’s limits lie, so you can act on or avoid risks according to those limits.

Belinda Mumma has over 12 years of experience implementing and maintaining vendor management and vendor due diligence software. During her career, she also has been responsible for policy and legal review processes; implementing, directing, and maintaining enterprise risk management software; and implementing and maintaining audit and exam findings software.