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The Florida Financial Hurricane: A Credit Union Risk Management Case Study

This case is about managing risk. It explores the challenges managers and board members of a Florida credit union encountered during the recent Great Recession.

Executive Summary

This case study looks at how organizations can improve their peripheral vision by expanding from a traditional, narrow risk management approach (interest rates and liquidity risk) to a strategic risk management capability—one that incorporates market risk, credit risk, liquidity risk, legal and regulatory risk, reputational risk, and business risk, as well as overall strategic risk, using both quantifiable and qualitative approaches. 

An ideal approach to risk not only focuses on managing defensive risk (downside) but also identifies strategic opportunity or offensive risk. Robust risk management requires attention to both sides of the risk equation. The danger today, in the post–financial crisis era, is that too many credit unions will be too risk averse, failing to aid their members at a time when they need their institution the most.

What is the research about?

This case follows the plight of Sunbeam Credit Union in Florida, a real credit union whose name has been changed. This credit union did not participate in subprime lending, thereby avoiding some of the era’s most obvious risks. But, it was nevertheless slammed by other simultaneous shocks, such as a membership exodus and the failure of high- grade loans. 

The second- and third- order impact of the events of the subprime debacle—the collapse of the construction industry and the subsequent emigration of construction workers, along with the loss of jobs—had the greatest impact on the credit union. Using actual financial results from the years leading up to the real estate crisis of 2007, case readers analyze the strategic decisions of Sunbeam’s leadership team and identify options for the credit union as it faces rising delinquencies and increasing regulatory restrictions.

What are the credit union implications?

The case of Sunbeam Credit Union is not rare. Neither does it have an easy answer. Schuurmans introduces a useful scenario- planning tool as part of his analysis. Rather than strategize around one presumed economic outlook, the team from Sunbeam comes to the crisis having considered four separate scenarios. That planning doesn’t change the plight of the credit union, but it does mean that the team responsible for the decisions was at least prepared for eventualities.

The case also forces readers to think about hard trade-offs between the inclination to serve members at any cost and the financial realities hard-hit credit unions face. As with any good case, the most salient considerations—excellent underwriting, strategic lending decisions—may no longer be under the control of the actors. Their options are constrained by decisions made long ago.

This report is sponsored by the Credit Union Executives Society (CUES).