John Lennon penned ‘we get by with a little help from our friends’.
Credit unions can need help too, say when placed under regulatory intervention. Does such an act signal ineffective Enterprise Risk Management practices of the credit union?
Regulators have the legislative power to impose an intervention on, or to ‘stage’, a credit union. A regulatory intervention seeks to minimize potential depositor losses and related insurance exposure. Dependent on the perceived severity of circumstances then there are multiple potential intensities of intervention. These can range from an early-warning to imminent insolvency. Specific information related to the number; identity; issues; and matters related to interventions are not in the public domain.
Just like their small business members then credit unions need to balance growth rate, cashflow and earnings. Over time then aggresive growth, capital investments or declining membership may strain capital adequacy, stretch liquidity, erode margins or surface other adverse effects.
Like their business members then credit unions need to offer a reasonable value proposition. Service offering, product range and operational footprint should be commensurate with the customer/member needs; economic climate; organization size; and competitive landscape. Over time then any related deficiencies may yield declined market/wallet share; elevated risk appetite; unsustainable operating efficiency; outdated management; inadequate governance practices and/or broader strategic challenges.
CREDIT UNION INTERVENTIONS
Interventions can be costly. The primary direct expense to a credit union is a higher premium for deposit insurance. This will impact the bottom line, potentially materially. Indirect costs may also be significant as executive and Board time is likely redirected to execute remedial requirements and to manage an elevated regulatory relationship.
Interventions are driven by specific perceived deficiencies. These may relate to a specific risk type (e.g. credit, liquidity); a specific inadequacy (e.g. oversight, policies); an atypical theme (e.g. growth, strategy) or other matters in the credit union.
There is no single remedy for interventions. Perhaps akin to a medical doctor appraisal of a patient then there may be various apparent symptoms and underlying causes. But there may be common themes, say based on historical ailments or current circumstances. Given the escalation to intervention then the remedial prescription will probably be more intense, and less palatable, than a hearty hot toddy.
Remedial resources vary by province. For example, BC credit unions may receive confidential consultative advisory services that are executed, and funded, by Stabilization Central Credit Union.
ENTERPRISE RISK MANAGEMENT
Risk is the lifeblood of any financial institution. For credit unions then taking deposits, extending loans and executing other services inherently involves risk. Entity-level oversight of risk - or Enterprise Risk Management - typically assesses credit, interest rate, liquidity, transaction, strategic, strategic, compliance and other risks as appropriate. Just the sort of topics that are likely relevant to an intervention. Whether a credit union intervention signals an ERM deficiency, in my personal view, rests on two questions.
First, to what degree were management and the Board surprised by the intervention and regulatory concerns?
CEOs and Board Chairs may relish surprises delivered by Santa Claus. Not so much by their regulator. If intervention concerns draw gasps then there may well be misunderstanding of regulatory expectations; inadequate risk oversight; and/or poor ERM execution. Surprises may suggest challenges that extend beyond ERM. For example, if a Board first learns of statutory compliance breaches from the regulator then risk culture and governance practices may be awry.
Second, are the risk competencies and oversight appropriate for the current organization size and complexity?
Progressive organizations typically grow over time. Academics suggest that gradual evolution of organizational size is typically accompanied by periodic step-changes in capabilities. For credit unions then there are arguably levels of size and complexity that may trigger internal step-changes, and perhaps external expectations, in regards appropriate maturity of risk oversight functions. As a ballpark then a recently published Oliver Wyman report notes that in 2016 ‘risk functions will account for about 4 percent of the operating costs of an average bank’. This benchmark may not be appropriate credit unions of all sizes and complexities but peer comparison of the maturity of risk managment function may be insightful.
To a Board Chair of a staged credit union then I urge due concern. The regulator may have identified one or more specific, material, time-sensitive threats to the membership that the Board is elected to represent. Board agenda should reflect this reality. As appropriate then seek advice or assistance. Related resources vary by province. Consider review of Board composition, competences and governance practices. And ultimately remember the arguably most important Board role is CEO selection.
To a CEO of a staged credit union then I encourage a deep breath. You are probably not going to enjoy this experience. The future will likely be required to be significantly different than the past. You may not agree with some perceived concerns. Expansive strategies and favoured initiatives may now deferred. Any ‘too difficult box’ may be prised open with gusto. The foreseeable future likely holds plentiful, potentially difficult, work; rather lower profitability; elevated levels of scrutiny; and no small measure of change. But it is hopefully an opportunity to question accepted norms, and to seek and embrace best practices that will - in time - yield organizational betterment and enhanced member service.
To regulators then I implore use of the motivation ‘carrot’ in addition to the penalty ‘stick’. Identifying the need for intervention is an important function, indeed duty, of any regulator. But as remedial actions are completed, trust is restored, and risk is demonstrably lessened then any onsite assessment and/or intervention appraisal should be undertaken in a timely manner. Incremental to risk-based prudential supervision then the motivational reward of successful betterment - and of normalized deposit insurance premiums - may be material indeed.
Unlike the Beatles then a staged credit union may not be feeling much love. But cooperation amongst cooperatives is a core credit union principle. And the industry is stronger together. So there are likely friends willing, even eager, to help. Let it be.
OSFI, federal regulator, ‘Guide to Intervention for Federally Regulated Deposit-Taking Institutions’ - Guideline: http://www.osfi-bsif.gc.ca/Eng/Docs/Guide_Int.pdf Overview & Process: http://www.osfi-bsif.gc.ca/eng/fi-if/rai-eri/sp-ps/Pages/gid.aspx Risk Management Assessment Criteria: http://www.osfi-bsif.gc.ca/eng/docs/11-risk_management.pdf
FICOM, BC provincial regulator, ‘Guide to Intervention - BC Credit Unions’ - Guideline: http://www.fic.gov.bc.ca/pdf/creditUnionsTrusts/GuideToIntervention.pdf FIA Review: http://www.fin.gov.bc.ca/pld/fiareview.htm
DICO, ON provincial regulator, ERM - Framework and Guide: https://www.dico.com/design/Publications/En/ERM%202011/ERM_Framework_September_2011.pdf
Credit Union Deposit Insurance Corporation, BC government credit union deposit guarantor - Publications: http://www.cudicbc.ca/Publications.html
Stabilization Central Credit Union - Services: https://www.stabil.com/services/
Oliver Wyman Risk Journal - December 2016: http://www.oliverwyman.com/our-expertise/insights/2016/dec/oliver-wyman-risk-journal.html
Colorado Credit Union Working Group on ERM - White paper: https://mwcua.com/wp-content/uploads/2014/09/White_Paper_ERM.pdf
Harvard Business School, ‘Managing Risks - A New Framework’ - Article: https://hbr.org/2012/06/managing-risks-a-new-framework
Harvard Business School, ‘Evolution and Revolution as Organizations Grow’ - Article: https://hbr.org/1998/05/evolution-and-revolution-as-organizations-grow
Wikipedia, ‘Too difficult box’ - Article: https://en.wikipedia.org/wiki/Too_difficult_box
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
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