Primary Risks
Cash can expose a credit union to a variety of risks, which include:
Credit Risk
Credit risk may affect a credit union when its balance on deposit with another financial institution exceeds the insured deposit limit. The insured limit is typically $250,000, but can be higher depending on how the deposit is structured at the depository institution.
Credit unions can mitigate credit risk by conducting an independent analysis of any financial institution in which they invest more than the insured deposit limit.
Compliance Risk
Cash operations and transactions are subject to a variety of laws and regulations, including, but not limited to:
| Law/Regulation | Outlines Requirements for: |
|---|---|
| Bank Secrecy Act | Monitoring cash transactions |
| OFAC | Identifying and preventing transactions to individuals and entities on the Specially Designated Nationals and Blocked Persons lists |
| Availability of Funds and Collection of Checks (Regulation CC) | Funds availability and collection of checks |
|
Regulation D, Reserve Requirements for Depository Institutions |
Reserve requirements for credit unions subject to Regulation D |
| NCUA regulations § 703.14, Permissable investments | Permissibility of investments, including underlying investments in sweep accounts |
Failure to comply with all applicable regulations exposes a credit union to fines, civil money penalties, and reputation risk.
Transaction Risk
Transaction risk is the risk of loss resulting from inadequate or failed internal processes/systems, human error, malfeasance, fraud, or external events (such as lawsuits or penalties). Inadequate systems for documenting transactions or processing data can expose a credit union to elevated transaction risk. Human error (for example, incorrectly posting a cash transaction) may also expose a credit union to transaction risk.
To mitigate this exposure, credit unions should establish written cash handling procedures and a strong system of internal controls to supplement supervisory committee oversight. Management should also perform and document due diligence reviews over third parties associated with cash operations (vendors, contract staff, other financial institutions, etc.) and obtain and review regular independent audits. Management may also consider setting up an internal audit program.
A credit union’s risk mitigation practices should be commensurate with the nature of its activities, business environment, and organizational structure.
Strategic Risk
Strategic risk is the risk of having excessive cash on hand/cash on deposit as it is a non-earning asset. A credit union can mitigate this risk by establishing thresholds for how much cash to retain in the vault and teller drawers. Any excess amount greater than the threshold can be placed into an interest bearing account.
Liquidity Risk
Liquidity risk is the risk that a credit union will not have the necessary cash flows to meet current and future loan and share demands or other financial obligations such as operating expenses and interest payments. Credit unions can use forecasting models (such as gap analysis, cash flow forecasts, and others) to project their liquidity needs. Credit unions may also use lines of credit to mitigate liquidity risk related to cash operations
Reputation Risk
Credit unions may be exposed to reputation risk when consumers lose faith in an institution because of poor controls over cash operations.
Last updated on December 18, 2020
