BankNews.com

BankNews

Risk and Finance: Better Together

By Thorsten Hein

Changing regulations and new accounting standards are creating enormous challenges for financial organizations. To successfully meet these new requirements, organizations need to rethink the way they operate.

A bank’s risk and finance groups typically operate separately with limited interaction. But together, they can begin to identify how different business assumptions might affect their financials, and from there create an IT modernization strategy that goes beyond effectively managing the new IFRS 9 and CECL processes, to one that helps the organization gain better insights into not only its risks but also its opportunities.

Institutions that view IFRS 9 and CECL requirements as opportunities to improve capital allocation and optimize returns are the most prepared to make finance more forward-looking.

The banking environment is colored by significant regulatory issues that cause business disruption. Regulations are increasingly complex with a long list of regulation and financial reporting requirements, including Basel II/III, BCBS, Corep, Finrep, AnaCredit, EBA Stress Testing, IFRS 9, FRTB, and the list goes on.

To meet all these requirements, the chief financial officer and chief risk officer – as those charged with budgeting and supervision – must now work together to deliver balance sheets and income statements that incorporate risk data. They must also satisfy shareholders with enterprise-wide capital, liquidity, and profit and loss optimization through budgeting and forecasting. However, these two roles tend to work from different perspectives. While the CFO is interested in presenting the financial results based on sophisticated analytics using the most appropriate models, the CRO is more concerned about the quality and the governance of these models, rather than the results they will generate.

In this vein, the CFO has traditionally been the face of investor relations, while the CRO has been described as a “chief worrier” brought out when things go wrong. These roles must continue to remain separate, but by more closely aligning CFOs’ and CROs’ skills, banks will further improve the relationship between the two, ensuring both these key roles collaborate if and when things do go wrong.

The bottom line is that the forward-thinking, analytically oriented CRO will pursue, in cooperation with the more risk-aware CFO, sophisticated and growing collaborations supporting the long-term transformation of risk management into an innovative source of value creation at the epicenter of bank management.

Together these two groups demonstrate how different business assumptions might affect a bank’s financials and create the best strategy for the bank. Making finance more risk-aware will prevent risk analytics data from being compartmentalized within risk, where it would be invisible to the finance department. More interconnected data and information sharing between risk and finance will allow finance departments to use regulatory data in key processes like budgeting and stress testing.

The challenge of the new IFRS 9 and CECL regulations requires the two groups to collaborate more closely. Following the operating model, risk and finance traditionally use separate and dedicated IT applications, but to efficiently manage the IFRS 9 and CECL processes both functions should at least share the same IT environment.

The impact of new analytics approaches, such as scenario-based analytics, with the right shared risk platform will enable the CRO and CFO to assess scenarios relevant to their firm’s business strategy. And for the CRO, advanced analytics will help build better models more quickly to support scenario-based risk and finance analyses.

The key differentiator of a single integrated environment is that the risk and finance teams can perform sensitivity analysis. For example, due to different scenarios, type of expected credit loss models, and business assumption or rules, executives can promptly see the impact on the balance sheet and income statement. An integrated approach also enables monitoring and orchestrating of the entire IFRS 9/CECL process and more.

In addition to an optimized approach to regulatory requirements and business opportunities, banks can also achieve benefits in terms of costs and efficiency. For example, Standard Chartered Bank, a multinational bank in 63 countries and territories, needed to fully integrate risk and finance systems to prepare for expected credit loss accounting standards. The bank saw a 27 percent reduction in regulatory costs after deploying a shared, integrated platform to build, deploy and manage all models needed to comply with new IFRS 9 regulations quickly and cost-effectively.

The bank reported the following five-year benefits:

  • 27 percent lower total cost for IFRS 9 compliance.
  • 17 percent more efficient model deployment in support of IFRS 9 compliance.
  • 60 percent more efficient model maintenance and management in support of IFRS 9 compliance.

Once CROs and CFOs get a flavor for the types of analysis that can be performed, and the speed in which it can be executed and summarized, they quickly realize that working together becomes a critical financial and capital planning capability that can be used to make better capital allocation and business decisions, increasing the competitive value of both the risk and finance departments.

Risk and finance are better together.

Thorstein Hein is a Principal Industry Consultant in the Risk Research and Quantitative Solutions Division at SAS. He specializes in global risk management operations insights both in banking and insurance, focusing on risk and finance Integration, International Financial Reporting Standards (IFRS) and stress testing. By applying experience from more than 20 years in business intelligence and analytics, and supporting financial services and risk management, he helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximize business performance.

  • Sign Up

  • Categories

  • Archive

Software: Kryptronic eCommerce, Copyright 1999-2019 Kryptronic, Inc. Exec Time: 0.065495 Seconds Memory Usage: 3.800079 Megabytes
Kryptronic