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Risk Management - The Supervisor’s Perspective National Supervisors’ Forum November 2013 David Matthews. Objective. 1. To provide you with an overview of risk management: - Rationale, terminology, risk systems - Two aspects – Risk Management system / process Risk Management culture

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Risk Management -

The Supervisor’s Perspective

National Supervisors’ Forum

November 2013

David Matthews


1. To provide you with an overview of risk management:

- Rationale, terminology, risk systems

- Two aspects –

  • Risk Management system / process

  • Risk Management culture

    2. To explain the Supervisor’s perspective on Risk Management – focus on culture!


  • What is Risk Management

    • Why is it important?

    • Definitions & Terms

  • Risk Management System

    • Identify, analyse, action plan

    • System overview

  • The Supervisor’s perspective

  • Examples - Risk-Based Approach to Decision Making

  • Questions & Answers


Analyse & Measure

Evaluate Internal Controls

Residual Risk

Action Plan

Monitor & manage

Section 1:

What is Risk Management?


Risk Management is a formal process that analyses prevailing risks facing the credit union and identifies appropriate responses for addressing them

A risk is anything that could impact negatively on your credit union – transactional or organisational

Impacts: Financial Loss, Disruption to Operations, Reputational Damage, Physical

Responses: Accept – Mitigate – Transfer – Avoid

Why is it important
Why is it important?

Republic of Ireland – now required by legislation

  • System, process, culture, Risk Officer, risk register

  • PRISM – focused on risk

    Northern Ireland – not required by legislation

  • But, a risk management culture is a key requirement of a well-run business

    All Board and management decisions and activities should be framed within a risk management culture

    Lessons from recent years where risk was not considered

Risk management terms
Risk Management Terms

Risk Management Culture - a credit union’s collective system of values that shape its risk decisions

Risk Capacity – how much risk can we afford to take? Determined by how much capital we have

Risk Appetite – amount and type of risk that we are prepared to seek, accept or tolerate

Zero, Low, Moderate, High

Risk Tolerance – the actual level of risk that we will accept

Risk management terms1
Risk Management Terms

Inherent Risk – the risk posed before systems and controls that relate to the risk are considered

Residual Risk – the level of risk after considering the effectiveness of systems and controls put in place to manage the risk

Section 2:

Risk Management System

Step 1 identifying risks
Step 1: Identifying Risks

  • Identify risks (current & future) that could impact upon the credit union

  • Will be similar (but not identical) for all credit unions

    • Depends on structures, products, services, delivery channels, etc.

  • Description of risk should describe impact, event, cause

    • To enable action to be taken

Step 2 analysing risks
Step 2: Analysing Risks

  • Impact & likelihood of occurrence

    • The impact of each risk is scored, e.g. 1 to 5

    • The likelihood of occurrence is scored, e.g. 1 to 4.

  • Scoring is a subjective exercise

    • Will vary between credit unions

  • Scores are multiplied to get the risk ranking score

  • Low scoring risks are excluded

  • High scoring risks are taken to next stage for further analysis

Step 3 determining residual risk
Step 3: Determining Residual Risk

  • This step will determine the threat posed by a risk once internal controls have been considered

  • A control is any measure deliberately put in place to manage risks

  • Determine effectiveness of these internal controls

  • Risk ranking score is multiplied by the controls’ effectiveness scores to determine residual risk

Step 4 report action plan
Step 4: Report & Action Plan

  • Process has identified internal controls that must be improved

  • Develop risk response plan

  • Report findings to the Board for approval

  • Delegate tasks to appropriate officers and set firm deadlines for delivery

  • Review effectiveness of actions

Section 3:

The Supervisor’s perspective

Supervisor s perspective
Supervisor’s perspective

  • Board and management should be aware of risks as well as rewards

    • Doesn’t mean that all risk must be avoided, but that decisions consider pros as well as cons

  • Assessment of risk should be part of the credit union’s decision-making process

  • Board should promote a strong risk management culture – key issue for Supervisors

Supervisor s perspective1
Supervisor’s perspective

  • Supervisors should ask themselves:

    • What would I want to know if I was making this decision?

    • Does the Chair encourage debate and dissent?

    • Are dissident views given fair consideration?

    • Does everyone contribute to the debate?

    • Are directors asking the right questions?

    • Are they really considering both sides of the argument?

  • Does the Board encourage a robust assessment of risk?

Section 4:

Risk-based approach to decision making – some examples

Introducing a new service
Introducing a new service


  • More services for members

  • Additional income

  • Cross sale opportunities


  • Compliance requirements

  • Conduct risks

  • Cost v benefit?

Staff structure
Staff Structure

Manager and six tellers

  • What if the manager is on leave or gets sick?

  • Manager may spend too much time on admin work

  • No promotional opportunities for staff

  • But – lower cost, quick decisions and communication

Proposing a dividend
Proposing a dividend

  • Surplus is sufficient to pay 4% !

  • Board keen to propose it, but what are the risks?

  • What is the outlook for next few years?

    • Should we boost our capital / reserves instead?

  • Attractive to savers – but do we need more savings?

    • Additional capital requirements

    • What about our borrowers (primary source of income)?

  • Precedent – members will expect same again

    • Reputational Risk if we can’t pay it

Loans to new members
Loans to new members

  • Potential for new borrowers identified in strategic planning process

  • Member survey said that assessment criteria were too strict and intrusive

  • Board is considering relaxing its requirements for small loans (to attract new borrowers)

  • What factors should the Board consider?

  • What are the risks that might result a) if the board proceeds? & b) if the board does not proceed?

Benefits of risk management
Benefits of Risk Management

  • More robust business decisions

    • Clear assessment of pros and cons

    • Fewer shocks and unwelcome surprises

  • Continuous process improvement

    • Should lead to better internal controls

    • Should facilitate sharing of best practice

  • Risk management culture

    • Structured approach to assessing opportunities

    • Enhanced member confidence

Key points
Key points

  • Objective is to manage risks, not to eliminate them

    • Accept, mitigate, avoid

  • Inherent Risk - identify, analyse, measure, rank

  • Residual Risk – consider internal controls, rank, plan

  • Process - identify, assess, manage and monitor risks

  • Boards should consider risk as part of their decision making process

  • Supervisor’s perspective – risk management culture should permeate the credit union