Risk managers and risk architects were enjoying a predictable start to the year when the Basel Committee released directives with an aggressive timeline that will surely change the game for data aggregation and risk reporting ‒ and, quite likely achieve the long-elusive goal of strategically aligning risk and finance within today’s financial institutions.
The Bank for International Settlements (BIS) Principles for Effective Risk Data Aggregation and Risk Reporting – now known as the 14 Principles – are intended to address a pervasive issue exposed in the financial crisis – the fact that many banks lack “the ability to aggregate risk exposures and identify concentrations quickly and accurately at the bank group level, across business lines, and between legal entities.”
To meet the 14 Principles requirements, which go into effect for global systemically important banks (G-Sibs) in January 2016 (with other organizations to follow), financial institutions must create an unequivocal single source of truth across risk and finance to ensure data consistency, transparency, security, and traceability
The role of the chief financial officer at financial institutions expanded significantly in the wake of the global financial crisis and ensuing regulatory reform. At the same time, risk and finance were becoming linked in the minds of stakeholders, both internal and external, as the inherent connection between these disciplines became manifest. While stakeholders increasingly expected these two functional groups to work in lockstep, progress toward this worthy goal has varied by institution, despite the best of intentions and clear evidence of financial gain.
The benefits of risk/finance alignment go well beyond regulatory compliance. An Economist Intelligence Unit global study of nearly 200 senior banking executives demonstrated a strong correlation between risk/finance alignment and overall financial performance in the institution.
Even the most committed organization can struggle with achieving risk and finance alignment. Getting leaders of the risk and finance departments to understand the other team’s perspective is a common hurdle. To foster greater cooperation, organizations must create structures for executive and employee interaction so that the two departments understand each other. Personal meetings are extremely important, and some banks are convening regular meetings between senior risk and finance executives as a formal part of work stream governance. Something as simple as positioning offices of finance and risk professionals in close proximity can help to foster cooperation and alignment. And, we've seen some customers today combine these functions at the board level, enabling them to operate together.
There is no question that culture plays a critical role in aligning risk and finance. An important element of joining those cultures is the ability to “speak the same language.” In this case, it begins with creating a single source of truth, a common view of risk, and common data relating to it, that yields transparency across the organization.
Sonny Singh is Senior Vice President and General Manager, Financial Services Global Business Unit at Oracle