For Banks facing squeezed margins and increasingly agile competitors, a lack of consistent data quality and insight is a significant hurdle for Finance and Risk teams trying to
co-pilot the business. Innovative Banks have brought the two functions much closer together. Since the financial crisis, Banks have discussed the need for better alignment between Finance and Risk. Those conversations did not happen straight away. In the months, and even years, following the onset of the financial crisis, Banks were operating ‘in the bunker’ trying to respond; working in a tactical, siloed approach within their existing functional boundaries. They lacked the breathing space to think strategically, and any new requirements were treated as projects. From 2012 onwards, as Banks started coming out of the bunker, two approaches began to emerge.
Most tried to find incremental remedies, slowly integrating new requirements into business as usual processes, still within existing functions and legacy architectures. One or two, however, began to think more strategically, looking at what might make sense in the long term and building proper integration plans to create step change. These organisations developed new functions outside those of traditional Finance and Risk, which became their go-to resource for standardised data management and high quality reporting and analytics, treating Finance and Risk as equal consumers of data.
Finance has traditionally enjoyed unique access to enterprise wide data but has used this solely for financial reporting, concentrating mainly on the profit and loss for management reporting to the business. Meanwhile, the Risk function has concentrated on assessing risk to the balance sheet – an area of focus for regulators as well as shareholders. Pursuing investments piecemeal, within individual functions, does not make sense – and shareholders lose out.
At a time when margins are low, the bank needs to exploit all of its assets, data is one of those assets. Thus, asset management principles rather than process management thinking applies. The case for integration is also strengthened by regulatory demands for transparency. Banks must not only meet more stringent reporting requirements, but also build a better understanding of implications across the business, so managers have a clearer appreciation of how their decisions impact capital. As the reporting regimes of Finance and Risk converge, maintaining separate reporting structures and infrastructure is counterintuitive and causes significant inefficiencies.
The aim should be to create an integrated service function that will become the enterprise’s go-to resource to support both Finance and Risk and potentially, at a later date the integrated service function will support the wider organisation if the same principles are applied to business operations data. But to begin with, a data operations centre of excellence with a single underlying infrastructure for Finance and Risk, consistent ways of working and strong service culture is required. An organisation that carves out resources from both Finance and Risk, and adds new talent in data engineering, data science and process management to create a separate entity with a new culture. Developing and nurturing this new culture will be challenging but critical. The key is to make this new organisation a destination of choice for talent with clear and rewarding career paths. Meanwhile, the existing Finance and Risk functions will be leaner, with access to greater insights fulfilling their principal duties.
Today, the imperative for change is clear – Finance and Risk integrations are high on the transformation agendas of most major global Banks. The Banks that thought strategically in the first place have made real progress and are a long way ahead and they are not looking back.
By joining forces, Finance and Risk can add value by making better decisions faster. Integration can deliver a single view of risk adjusted returns, while data transformation provides the customer with the insight necessary to drive product development. Exploiting these gains makes it possible to allocate capital more efficiently, and integrated working and a common infrastructure lead to better control and operational synergy.
The new Finance and Risk operations function will be a service provider to accountable owners of Risk, Finance and Regulatory Reporting. Additionally, the function will have the capability and infrastructure to support owners and users with insightful analytics for internal management reporting. AI will link external and internal data to drive out increased value and insight around potential risk and future performance. The function will own Finance, Risk and Regulatory Reporting processes including the associated data and system architecture. Common ownership will drive enhancement in data quality and the data the function owns and produces will be seen as the trusted source for the rest of the organisation – ‘kite marked data’. To do this Finance and Risk operations will own data definitions and data taxonomies while having at a minimum oversight of e2e data controls. The function’s processes will be primarily automated, supported by significant improvements in data quality, and automated learning will help to drive continual process improvement. Ultimately, Finance and Risk operations will sustainably and efficiently support the organisation understand risk and financial performance in a controlled manner.
Successful transformation requires executive buy in from day one, with the C suite – especially Chief Financial Officers and Chief Risk Officers – leading the charge, acting as leaders of the Bank and partners rather than owners of their own empires. There may be stiff resistance from staff and the cultural shift required is not to be underestimated. It will take a significant shift in mindset from those accountable for effective Finance and Risk stewardship to relinquish ownership of the processes, systems and data that facilitate their decision making. Individuals and teams are wedded to existing structures and silos, so leaders will need to invest considerable energy in convincing colleagues of the need to change. Defining the exact end state for the organisation would be wrong: the rate of changes to regulation and technology makes it almost impossible. This is not a one off programme, and the speed of travel is secondary to reaching the destination.
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