For banks facing squeezed margins and increasingly agile competitors, a lack of consistent data quality and insight is a significant hurdle for risk and finance teams trying to transform the organisation. Innovative banks have brought the two functions much closer together, says KPMG’s Aris Kossoras
Since the financial crisis, banks have discussed the need for better alignment between risk and finance. Has there been any progress towards this goal?
Aris Kossoras: Those conversations didn’t happen straight away. In the months following the onset of the financial crisis, banks were operating ‘in the bunker’, trying to respond, but in reality working with a tactical, siloed approach. They lacked the breathing space to think strategically, and any new requirements were treated as non‑core projects.
From 2012 onwards, as banks started coming out of that bunker, two approaches began to emerge. Most tried to find remedies, slowly integrating new requirements into business‑as‑usual processes rather than through dedicated organisational design or data programs. One or two, however, began to think more strategically, looking at what might make sense in the long term and building proper integration plans. These firms developed a new function outside those of traditional risk and finance, which became their go-to resource for high‑quality, standardised data, reporting and analytics.
Today, the imperative for change is clear – finance and risk integrations are high on the transformation agendas of almost all major global banks. The banks that thought strategically in 2012 or 2013 have made real progress and are a long way ahead.
What is driving the need for change?
Aris Kossoras: Mainly common sense. Finance has traditionally enjoyed unique access to enterprise‑wide data but has used this solely for financial reporting, concentrating mainly on the profit and loss for management reporting to the business. Meanwhile, the risk function has concentrated on assessing risk to the balance sheet – an area of focus for regulators as well as shareholders.
Pursuing investments piecemeal, within individual functions, does not make sense – and shareholders lose out. At a time when margins are low, the bank needs to exploit all of its assets. Data is an asset, not a process.
The case for integration is also strengthened by regulatory demands for transparency. Banks must not only meet more stringent reporting requirements, but also build a better understanding of implications across the business, so managers have a clearer appreciation of how their decisions impact capital. As the reporting regimes of finance and risk converge, maintaining separate reporting structures will no longer be sustainable.
What should the new risk and finance model look like?
Aris Kossoras: The aim should be to create an integrated, shared service that will become the enterprise’s go-to resource for high-quality, standardised data, reporting and analytics to support both risk and finance, as well as the wider organisation: a data management centre of excellence with a single underlying infrastructure.
This will be a new way of working, carving out resources from both risk and finance, and adding new talent in data engineering, data science and process management to create a separate function with a new culture. Developing and nurturing this new culture will be challenging but critical.
Meanwhile, the existing finance and risk functions will be leaner, with access to greater insights.
What benefits would an integrated risk and finance function bring?
Aris Kossoras: By joining forces, finance and risk can add value by making better decisions faster. Integration can deliver a single view of risk‑adjusted returns, while data transformation provides the customer with the insight necessary to drive product development. Exploiting these gains makes it possible to allocate capital more efficiently, and integrated working and a common infrastructure lead to better control and operational synergy.
Wholesale transformation doesn’t happen overnight. How should banks approach this and what is the first step?
Aris Kossoras: Successful transformation requires executive buy‑in from day one, with the C‑suite – including chief financial officers and chief risk officers – leading the charge. There may be stiff resistance from staff who are wedded to existing structures and silos, so leaders will need to invest considerable energy in convincing colleagues of the need to change their default ways of operating.
Defining the exact end‑state for the organisation would be wrong: the rate of changes to regulation and technology makes it almost impossible. This is not a one‑off programme, and the speed of travel is secondary to reaching the destination. The key is setting a clear direction of travel and making the right decisions in relation to the workforce and technology along the way.
Aris Kossoras is a partner in KPMG’s financial services team and co-author of the white paper Integrating Risk and Finance for Data Transformation.