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ARMAGH CREDIT UNION

Financial Risk Management Policy

This policy was adopted by the Board of Directors of Armagh Credit Union Limited
Signed:Position President

Position

Treasurer

Date:

Armagh Credit Union is authorized and regulated by the Financial Conduct Authority and Prudential Regulation Authority: Registration Number 573925: Version Dec2015


ARMAGH CREDIT UNION

Overview
This policy covers the key high level financial risks that are faced by Armagh Credit Union as a result of the nature of its business model and how these risks are managed by the Board of Directors of the credit union. These risks are largely influenced by external and macroeconomic events that are outside the control of the credit union. However, it is important that the Board is aware of these risks and has a plan in place to mitigate their effects on the internal operation of the credit union. The key areas covered are as follows: Interest Rate Risk ­ Loans & Investments Counterparty Risk - Investments Funding Risk - Savings Funding Concentrations - Savings

Lending concentration risk and large lending exposures are covered in our Loans Policy.

Interest Rate Risk
A rough breakdown of our Balance Sheet assets is as follows: Loans to Members Other Assets 33% 4% Deposits & Investments 63%

The first two categories give rise to a potential interest rate risk. Loans to Members - Armagh Credit Union charges an interest rate up to 12.68% per annum. This is the maximum amount that we can charge. The rate is variable, so it can be reduced at the option of the Board. However, our policy is to keep it at 12%. If market rates for personal loans were to move significantly below this rate, the credit union could be exposed to members transferring their loans to other financial institutions, thereby reducing the credit union's overall income. To mitigate this risk, we can do a combination of the following: Reduce our interest rate (not our preferred option) Pay a Rebate of Interest at year end. This option is dependent on the credit union having an adequate surplus. The rate of rebate can be varied in line with market requirements. Emphasise the benefits of a credit union loan, including flexibility, insurance benefits and the ability to repay the loan early without penalty.



Deposits & Investments - The return that we receive on our investments is influenced by market rates and in particular by the Bank of England rate. To mitigate the risk of unfavourable rate movements, we always hold a proportion of our deposits and investments in fixed rate products.

Counterparty Risk
This risk can potentially arise due to the business failure of a counterparty with which we have invested surplus funds. To mitigate this risk, we ensure that our investment portfolio is spread over different counterparties. We also ensure that our deposits and investments are held in capital guaranteed products in institutions with as high a rating as possible.

Funding Risk
Armagh Credit Union is authorized and regulated by the Financial Conduct Authority and Prudential Regulation Authority: Registration Number 573925: Version Dec2015


ARMAGH CREDIT UNION Almost 85% of the credit union's funding is received by way of member savings. The two key risks that we face in this area are: Rate Risk ­ the risk that market rates for savings rise to the extent that members transfer their savings to other financial institutions, and Reputational Risk ­ the risk that the credit union (or the movement in general) suffers reputational damage that leads to a significant withdrawal of savings. a risk that market interest rates could rise to an extent that would make y attractive, but credit union savings less so. This is because the cap on of 12% limits our income-earning potential and thereby indirectly caps rate at around 5%. To mitigate this risk, we can do a combination of the

Rate Risk ­ There is credit union loans ver our loan interest rate our potential dividend following:

Reduce our rebate of interest and allocate more of our surplus to dividend. Emphasise the benefits of saving with the credit union loan, including access to loans.

In addition, our savings cap (currently ё15,000) ensures that our average savings are low and would be unlikely to be of interest to other financial institutions offering high rates of interest. Reputational Risk ­ There is always a risk that negative publicity relating to this credit union or credit unions in general could cause reputational damage that might result in a "run" on the credit union by savers. This may or may not be within our control. To mitigate this risk, we can do a combination of the following: Ensure that we have adequate liquid funds to deal with withdrawal requests (see Liquidity Policy). Ensure that our front line officers are equipped with the knowledge and interpersonal skills to reassure concerned members at the counter. Contact the ILCU for assistance with communications with members and dealing with media queries. Remind our members that their savings are covered by the Financial Conduct Compensation Scheme.

Funding Concentration
Source of Funds - This is the risk that our funding (savings) is sourced from too few members. This risk is mitigated by the low monetary cap on savings from an individual member of ё15,000. As a result, we currently have approximately 8000 members with average savings of ё2,274. Time / Maturity Profile ­ This is the risk that the maturity profile of our liabilities (savings) is insufficiently spread, resulting in the risks inherent in a large part of our funding maturing at the same time. In this credit union, all of our savings are available "on demand", except for those that are held as security against a loan. This equates to approximately 78% of our savings. This risk is mitigated by a combination of the following: The loyalty of our members, most of whom have been members for many years. Ensuring that we have adequate liquid funds to deal with withdrawal requests. Emphasising the benefits of saving with the credit union, including access to loans and insurance benefits (which can be lost if savings are withdrawn).

Armagh Credit Union is authorized and regulated by the Financial Conduct Authority and Prudential Regulation Authority: Registration Number 573925: Version Dec2015