Posts

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Excerpt: Silo Risk Management Needs To Stop

Many credit unions are beefing up their risk management process.  However, a critical component of the risk management process that is missing for many is evaluating and managing risk in aggregate.

According to conventional wisdom, risk is quantified and managed in silos—including interest rate risk (IRR), credit risk, concentration risk, etc.  External forces no longer support this conventional wisdom as the world has changed.  Our belief is that decision-makers and regulators need to have a more comprehensive view of risk by attempting to quantify and manage risks related to the entire financial structure.

To read the full article, please see our c.notes page, available here.

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Proposed IRR Regulation Could Have Unintended Consequences

C. myers agrees with the objective that most institutions should have an effective interest rate risk (IRR) management policy supported by an effective IRR program.  However, we do not agree that it should be regulation.

Keep in mind as you read our comments that our business is to provide asset/liability management services to financial institutions.  We have worked with hundreds of credit unions providing long-term risks to earnings and net worth simulations, static and dynamic balance sheet analyses and net economic value (NEV) simulations.  A regulation of this nature would likely materially increase our business opportunities, yet we do not believe it is in the best, long-term interest of the industry.

One primary reason that we do not support the proposed regulation is that it is ambiguous.  We understand this ambiguity is necessary.  However, ambiguity will lead to subjectivity when implementing the regulation.  Whether a credit union has a written policy with adequate limits and an effective program addressing IRR may ultimately be determined by each credit union’s most recent examiner.

Please click here to read our full response to the proposed IRR regulation.

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Corporate Shuffle: Questions To Ask When Searching For Alternative Providers

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Many credit unions rely on the corporate credit union system for mission-critical functions; however, changes in the corporate system are imminent.

Alternative providers could possibly include other corporates, newly formed CUSOs, the Federal Reserve, large banks and publicly held companies.  It is important to objectively evaluate each on their real merits.

Following are just a few questions you may want to consider:

  • What are the three top decision drivers for evaluating various service providers?
  • What are potential threats to your credit union’s business model?  (e.g., if your credit union has high loan demand and your corporate provided a line of credit, what are alternatives?
  • What strategic initiatives are you willing to forego during this service conversion?
  • What will be the hard-dollar cost of the conversion?  Have you budgeted for it?
  • Will the shift be transparent or nearly transparent to members?

Invest the appropriate time to create an RFP that details your requirements and rank them in importance with a weighting system, such as a scale of 1 to 10.  A few examples of requirements you may consider weighting include:

  • Necessity of investing upfront capital to receive services
  • Cost to process ACH transactions
  • At least __ years of previous demonstrated financial strength