Guest Editorial by Edward Vincent, Chief Executive Officer, SRA Watchtower
In an industry that demands constant vigilance, relying on outdated, siloed, and subjective risk management practices can be the most dangerous threat to your credit union. Establishing a proactive culture of risk equips leading credit unions to enact risk-informed strategic decisions, reduce blind spots, and ultimately enhance shareholder value.
Rethinking Risk Management Strategies
Many credit unions only employ a bottom-up risk management approach, which is a good start but does not holistically address risk. Credit unions must also set the tone at the top, enhance risk awareness, and reshape perceptions of risk leadership. To create a proactive and risk-aware culture, senior leadership engagement and buy-in are essential, beginning with building an enterprise risk management (ERM) program.
Fostering a risk-aware culture also requires a holistic approach to encouraging employees at all levels to identify and respond to risks. Risk management should be seen as a value-adding function contributing to the institution’s overall strategic goals, rather than a compulsory task with little impact. Credit unions that empower every team member to understand their role in managing risk ultimately create a more resilient and innovative institution.
Drivers That Influence Risk Culture
Establishing a strong risk culture requires a deep understanding of the key drivers that shape it. After guiding numerous financial institutions through their enterprise risk maturity assessment, five critical drivers stand out as fundamental to an effective risk culture, including:
Top-Down Approach – The credit union’s leadership must set a clear and consistent tone surrounding risk management. Executives and board members who prioritize and integrate risk management into their decision-making processes send a powerful message throughout the organization. Commitment at the highest levels creates a culture where risk considerations are a fundamental part of everyday operations.
Accountability – Accountability establishes clear roles and responsibilities for all departments to ensure goals align across the institution. Every employee should have defined roles that foster a sense of ownership in identifying and managing risks.
Effective Challenge – An effective challenge mechanism promotes proactive collaboration across different departments to identify potential issues early and continuous improvement in risk management practices. This involves creating an environment where constructive feedback is valued and diverse risk perspectives are actively sought and considered.
Incentives – Incentives must be closely associated with risk management objectives to ensure that employees are motivated to act in the best interests of the credit union. Credit unions can incentivize prudent risk-taking and long-term thinking through performance evaluation metrics and rewards that recognize and reinforce risk-aware behavior.
Visibility – High levels of risk awareness throughout the credit union are fundamental to a robust risk culture. Ongoing education and training programs ensure that all employees understand the risk implications relevant to their roles and the institution’s broader risk profile. Regular communication promoting risk awareness also develops a mature risk culture where every employee recognizes their role as a risk manager.
Transforming the Credit Union’s Risk Management Strategy
Credit unions aiming to transform their risk approach must start by changing the perception of risk managers, who have historically been seen as the ‘department of no.’ However, the success of modern risk management calls for a more collaborative approach between Risk, the C-suite, and the Board.
Risk leaders should be positioned to support rather than restrict the team by working alongside leadership to align strategy and operational goals within a robust risk management framework. When risk leaders demonstrate how their insights can help achieve organizational objectives and play a role in the credit union’s overall strategy, they become integral to the decision-making process. Risk management evolves into the ‘department of how,’ also known as ‘how do we get to yes.’
In addition, having detailed risk appetite statements and a set of essential key risk indicators (KRIs) are fundamental to effective ERM. Beginning with a set of standardized KRIs, often available within an ERM platform, and supplementing with personalized departmental measures enables timely monitoring and evaluation against quantitative benchmarks. Overlaying risk appetite statements highlights the credit union’s risk tolerance and provides a framework for decision-making. Leveraging technology to integrate, manage, and analyze risk data not only reduces manual processes and mitigates ‘hidden factories,’ but it empowers stakeholders to spend time optimizing risk rather than measuring and aggregating data.
Looking Forward
While it is not groundbreaking to note that risk and reward are directly related, many credit unions today still fall short of optimizing risk and therefore forgo available returns. The future of risk management demands the transformation of experience into expertise at scale. For innovative credit unions, scaling risk expertise starts by establishing a proactive culture of risk, which equips the organization to enact risk-informed strategic decisions, and in turn, increases shareholder value.
About the Author
Edward "Ed" Vincent is the CEO of SRA Watchtower, a financial technology services firm and the provider of Watchtower, The Holistic Risk Intelligence Platform™. He has more than 25 years of experience leading financial technology SaaS organizations, building services and analytics teams, defining and implementing content and product strategy, and innovating products in the insurance, capital markets, investment banking, private equity, and compliance segments.