In financial institutions, close alignment of risk and finance functions may be linked to higher profitability, according to new research
Banks and other financial institutions must improve how their finance functions understand and use risk considerations and information. This is not only to better protect themselves against new and emerging risks, but also to help devise a sustainable growth strategy. To do this, finance departments in many financial institutions are taking steps to ensure better access by senior executives to risk-related information. This has expanded dramatically the role of the chief financial officer (CFO) at financial institutions around the world, who must champion a tighter alignment between risk and finance within their organisations.
Transforming the CFO Role in Financial Institutions: Towards Better Alignment of Risk, Finance and Performance Management, a new study by the Economist Intelligence Unit, produced in collaboration with CFO Research Services and sponsored by Oracle, shows that financial institutions that benchmark themselves well on aligning their risk and finance functions appear to be doing better financially than their peers. In a survey conducted for the study, of those respondents who rank themselves much better than their peers at alignment between risk and finance, 60% are also much better at financial performance and 92% are above average. The equivalent figures for those who rate their firms as average or worse at alignment are 8% and 32% respectively.
The global study found that the integration of detailed risk data with information from finance into a coherent whole is becoming an essential part of banking. Competitive and regulatory pressures have made a thorough knowledge of underlying risk shared across the company best practice. This is not easy or cheap to achieve, but it has become a basic expense of banking. Moreover, financial institutions can no longer afford the luxury of separate world views for finance and risk.
Another finding is that CFOs in particular, and financial institutions in general, need to use risk considerations much more widely, in particular to obtain competitive advantage. A majority of finance functions have not significantly increased the use of risk considerations in financial analysis and budgeting. The nearly half of financial institutions where leadership and business lines are uninterested in greater use of risk, or where the culture militates against it, will be left behind.
The report says that alignment requires not just common data, but also processes and structures for people to work together. Although common data are important, the main barriers to alignment between the risk and finance functions are their differing perspectives (cited by 52% of respondents and cultures (mentioned by 43%).
Overcoming these impediments to alignment requires the creation of structures for executive and employee interaction so that the two departments understand each other.
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