Aligning Risk and Finance, Enough Said Already?

With black swan events on the rise, how are financial institutions responding?

Stress tests conducted by regulators on both sides of the pond have now moved from a onetime exercise to de rigueur events.  Earthquakes in Asia, civil unrest in Middle East & North Africa, and greater economic uncertainty in the EU might not have been factored into the underlying scenarios, but are definitely giving banks around the globe reason for navel gazing as far as their risk reporting systems are concerned.

The post-crisis CRO has had to adapt to shifts in the risk landscape that include new financial regulations (as a result of Dodd-Frank in the US), new global capital adequacy, stress testing and liquidity risk monitoring requirements (Basel III), and the adoption of standards defined in IFRS. While many of the new regulations stem from a desire to ensure long-term solvency of financial institutions, the guidance, especially from the EU and BIS, tacitly assumes immutable risk-type taxonomy and an orderly marketplace with sufficient liquidity.

How do banks get there, and what’s stopping them for mastering the business intelligence needed in today’s economic and regulatory climate?

New research from IDC reveals numerous hurdles – from complexity in underlying data architectures following years of M&A, to the complexity of the financial instruments themselves.

Even more pervasive, however, is a fundamental lack of alignment between risk and finance departments, which has become essential to not just respond to various stakeholders but also ensure a more solvent and profitable organization going forward.

Closer alignment between the risk and finance function is the starting point for success in today’s transformed risk paradigm.  From there, financial institutions can move forward confidently in creating an integrated risk and finance decisioning platform that is "compliance centric" – an environment in which business processes, analytic data models, application functions, and policies are all designed with accounting, regulation, and risk requirements built in at the transaction level.  This approach will ensure that instead of just solving problems of the past, financial institutions are on a sustainable path to profitability through the current environment of increased uncertainty and greater regulation.