Risk Management

A credit union’s ability to manage the risks that can affect earnings depends on the following key elements:

People

Examiners should foster an open and ongoing dialogue with credit union management and officials. A healthy dialogue will help management understand and assess the credit union’s earnings in the context of its business model and strategies.

Board of Directors

A credit union's board of directors is responsible for establishing the risk tolerances, policies, strategic plan, and operating budget. The board of directors should seek to strike a balance between the:

  • Immediate return of earnings to members (in the form of dividends, lower rates on products and services, etc.), and
  • Retention of earnings to fund future member benefits and sustain operations through capital accumulation.

The board of directors should hold senior management accountable for implementation of policies and strategies, and verify the credit union is operating within board-approved risk tolerances and budgeted projections.

The board of directors is responsible for monitoring the credit union's performance as it relates to the strategic plan and operating budget.

Asset-Liability Management Committee

The board of directors may appoint an ALCO (or similar committee) to monitor the credit union’s balance sheet position, which includes recommending a pricing structure for the credit union's products (for example, loans and shares). The committee’s recommendations may also influence the credit union's net interest margin, a key indicator used to measure whether income from loans and investments is sufficient to cover cost of funds.

The committee should also:

  • Review ALM reports produced by management for compliance with board-approved strategies and to verify the credit union is on track to achieve earnings targets
  • Establish and maintain adequate risk measurement systems to identify and quantify risk exposure related to both earnings and capital
  • Communicate accurate, timely, and relevant information about the level and sources of risk exposure through its reporting process

If the board of directors does not establish an ALCO, it remains responsible for these duties.

Senior Management

A credit union's senior management is responsible for implementing board-approved policies and strategies, and for adhering to board-approved risk limits and budgets. With respect to earnings, senior management should:

  • Adjust operational activities to achieve strategic goals—If the board of directors has developed a budget or strategy directing the credit union to achieve a certain level of earnings for the year, senior management is responsible for achieving the earnings goal. Management’s actions may include offering new products or services, recommending rates or fees, opening or closing a branch, or other changes to operations.
  • Price the credit union's products and services competitively—To attract business and generate earnings, credit unions need to price products and services competitively. Senior management is responsible for evaluating competition in the marketplace and ensuring the credit union offers products that meet members’ needs at competitive prices.
  • Balance staffing and income levels—The board of directors and senior management should hire sufficient staff to meet members’ needs and provide oversight and control for the seven risk areas. Staffing needs should be balanced against the credit union's ability to fund the expenses associated with its staffing levels.
  • Monitor the credit union's earnings position on an ongoing basis—Senior management should continuously monitor the credit union’s earnings position and address deviations from the board-approved earnings strategy to meet established earnings objectives. This may involve a quantitative evaluation of earnings. Senior management (or a contracted third-party vendor) should produce reports on the credit union's ALM position, including an evaluation of the credit union's net interest income. See also Asset-Liability Management Committee.
  • Maintain accurate financial reporting—NCUA regulation § 702.113, Full and fair disclosure of financial condition, requires FICU financial statements to provide full and fair disclosure of all assets, liabilities, members' equity, income, and expenses. This section also requires the credit union to fund the ALLL account appropriately before paying dividends.

Policies and Processes

Strategic Plan

It is vital for the board of directors and management to develop and document a sound strategic plan to guide the credit union’s operations. Strategic plans typically cover a three to five-year period.

A credit union’s strategic plan should outline the board of directors' strategy for achieving a balance between:

  • The return of earnings to members in the form of member benefits (such as dividends, lower rates on products and services), and
  • The retention of earnings to fund future member benefits and sustain operations through capital accumulation.

The strategic plan will include a number of business objectives and plans, which may affect earnings, both positively and negatively. A credit union’s strategic goals may not always include efforts to maximize earnings. However, credit unions need to generate enough earnings to cover the costs of providing services to members and to maintain a safe and sound level of capital.

For these reasons, any strategic decision management makes should be addressed in the credit union’s budget and take into account the potential impact on earnings.

A credit union’s strategic plan should address fixed assets and their impact on earnings. Before making a major investment in fixed assets, the board of directors should approve a strategic plan that outlines the need for the asset and its effect on the credit union’s earnings and overall financial condition. For more information, see NCUA Supervisory Letter 15-03, Fixed Asset Management.

Budget

A credit union’s operating budget may be based on a calendar or fiscal year period. Management should develop an annual operating budget and obtain board of directors’ approval before the budgetary period begins. The budget, and periodic monitoring of the budget, protects the credit union’s future earnings by helping to:

  • Forecast and control income and operating expenses
  • Execute business strategies
  • Manage risk exposures

An appropriately designed operating budget should include, at a minimum, the following projections:

  • Income on loans and investments
  • Fee income
  • Net income
  • Total assets
  • Total shares
  • Capital and net worth
  • PLLL expense
  • Operating expenses, including the costs of implementing any planned new program(s) or project(s)
  • Other relevant areas

Senior management should periodically compare and report actual results against the approved budget and explain material variances to the board of directors. When variances identify the need to revise the budget to meet strategic objectives, senior management should revise the budget and obtain the board of directors’ approval of the revisions.

Last updated on May 01, 2023