Types of Risk

Risk management is an area that leads to a lot of jargon.  One of which is the different types of risk that you can have.  Below we set look at 6 common Credit Union risks:

Credit Risk

The risk at the heart of your Credit Union. This is the risk of the other party in a transaction defaulting on their obligations.  A member failing to repay a loan is the most common example in a Credit Union.  Credit checks, assessments of member’s income and expenditure and guarantees are some of the ways this risk is mitigated.  Another example of credit risk would be the risk of your bank going bankrupt and the Credit Union losing its deposits.  Many Credit Unions are spreading their funds between a number of banks in order to reduce this risk.

Liquidity Risk

Is the risk of not having sufficient liquid funds (cash) to meet your obligations and debts.  It would also cover the risk of the Credit Union failing to meet its liquidity ratio.  In the current climate this is less common with most Credit Unions high share to loan ratios.  It can still be an issue depending on how your bank deposits are tied up.

Concentration Risk

This is basically the risk of having too many eggs in one basket. It can affect a Credit Union in a number of ways. For example if you have all your members living in one area or with one employer you will be exposed to concentration risk.  If a disaster hits the local area where your members live or the sponsoring employer goes bankrupt then this will have a major impact on the Credit Union.  Another example of concentration risk is if a small group of your members hold a large proportion of your shares or loan balance. Changes in this membership grouping can have a large financial impact on your Credit Union.

Conduct Risk

Conduct Risk is often described as the risk to the delivery of fair customer outcomes, or to market integrity.  It therefore covers a very wide area including topics such treating customers fairly.  It is the primary focus of the FCA.

Interest Rate Risk

The risk of changes in interest rate having a detrimental impact on a Credit Union.  How exposed Credit Unions are to interest rate risk depends on a number of factors such as if it has borrowings and its level of deposits.

Regulatory Risk

The risk of penalty or censure for failing to meet your regulatory or legislative requirements.   Credit Unions operate in a highly regulated sector and are therefore exposed to regulatory risk. The recent introduction of the senior managers regime and the forthcoming GDPR will increase this risk.

See our risk management pages for more information by clicking here.

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