Report Summary

The combination of a global financial crisis, increased uncertainty and greater regulation has expanded dramatically the role of the chief financial officer (CFO) at financial institutions around the world. In such a challenging environment, financial institutions must now devise a sustainable growth strategy and be better protected against new or emerging risks. To do so, many finance departments are recasting their business processes in an effort to provide better access to information for internal decision-making, risk management, financial reporting and regulatory compliance.

One of the essential tasks for financial institutions is to improve how their finance functions understand and use risk considerations and information. Financial institutions have certainly been active: in the survey conducted by the Economist Intelligence Unit for this study, in collaboration with CFO Research Services, over 99% of respondents report that their companies have significantly increased the use of risk considerations or metrics in at least one area of operation or decision-making in the last two years.

This study, sponsored by Oracle, draws on a global survey of nearly 200 senior banking executives in finance and risk, as well as in-depth interviews with 16 finance and risk executives, corporate leaders and other experts to examine the current state of finance processes and how these processes could be modified to address the new competitive and regulatory dynamics faced by financial institutions. Its key findings include:

• Alignment between the risk and finance functions is now essential to banking. As David Craig, CFO at Commonwealth Bank of Australia, puts it, “risk and finance are inextricably linked.” Outside stakeholders now expect risk and finance to work together and certain activities, from capital planning to the conduct of stress tests, cannot take place efficiently without close co-operation between the two functions. Survey respondents most often cite improving risk processes in general as the leading risk-related priority for finance functions (54%), followed by integration of data across the organisation (46%) and improving the management of data relevant to risk (40%).

• Financial institutions can boost profitability by a better alignment of risk and finance. Financial institutions that benchmark themselves well on aligning their risk and finance functions also say they are doing better financially. Among survey respondents, of those 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 are average or worse at alignment are 8% and 32% respectively. The benefits are both specific, such as identifying potentially profitable clients, and general, such as providing a greater understanding of the global context in which major strategic decisions are made.

• Alignment between risk and finance begins with good data, but the bigger problems are different perspectives and cultures between the two functions. The leading risk-related priorities for finance departments are improving processes (cited by 54%), data integration (46%) and data management (40%). Alignment involves the creation of a common view of risk, and common data relating to it, across the company and especially between the risk and finance departments. This is essential for alignment, but not sufficient. The survey reveals that the biggest barriers to the two functions working closely together are that the primary focus of each is not the same (52%) and that there are more general cultural differences (43%). Overcoming these impediments to alignment requires the creation f structures for executive and employee interaction so that the two departments understand each other.

• Attention to risk lowered downside risk for US banks during the 2008-09 global financial crisis. Research shows that at the 15% of US banks where the chief risk officer (CRO) was among the five highest-paid executives in 2006, the proportion of total assets made up by mortgage-backed securities at the time of the crisis was one-fortieth that of banks where the CRO was less well paid. There is even a correlation between higher CRO pay and lower stock volatility.

• Financial institutions are now better prepared for another crisis like the last one, but may not be as well prepared to deal with
  new or emerging risks. Forty-five percent of survey respondents say that their company’s risk management prepared them well or very well for the 2008-09 global financial crisis, and 63% now have this level of readiness for a similar shock. Although positive news, 46% admit that they need to do more to identify emerging risks.

• Financial institutions are investing more in technology to improve their ability to integrate risk information into financial and
  performance management. The main barriers to incorporating risk based data into financial and performance management are poorly integrated systems (cited by 41% of survey respondents) and inconsistent metrics within their companies (37%). Moreover, 28% of respondents believe that information silos within their companies erode the capacity to share relevant risk information. Financial institutions have responded with significant investment in this area.

• A majority of finance functions are not applying risk data beyond compliance and product allocation to areas like analysis and budgeting. Fifty-six percent of surveyed financial institutions have increased their use of risk data in compliance efforts, and 54% in product allocation–both areas where its application was already well established. Fewer are applying the data more broadly, to significant responsibilities of the finance function such as financial analysis (41%), front office lending (39%) and budgeting (36%). Only 19% are making greater use of risk data in assessing employee remuneration despite stakeholder and regulatory demands in this area. CFOs need to make sure they go beyond gathering risk data to using risk data more broadly.