In a bygone era of financial services, chief financial officers (CFOs) had roles that tended not to land them in the spotlight. But the troubles that plagued financial companies in the early part of the century, such as the Enron scandal and the financial crisis of 2007–08 – and the new regulatory environment that came with it – have CFOs completely shifting gears.
Gone are the days when a CFO had two primary areas of responsibility: monitoring profit and loss (P&L) among the various businesses of a bank and then explaining that performance to analysts and shareholders.
New regulations, accounting standards and advances in areas such as big data analytics have seen these important financial figures work much more closely with their chief risk officer (CRO) counterparts on such areas as risk management and front-office businesses. Unsurprisingly, CFOs tend to come more and more from risk management backgrounds as as the role increasingly requires attention to P&L and balance sheet.
This change can be attributed to several reaons. In the wake of the crisis, banking regulators had wanted firms to have a much better forward-looking view of risk and to set aside more capital in advance of losses occurring.
International Financial Reporting Standard 9 and the Current Expected Credit Loss standard forced banks to do just that – consider accounting and regulatory standards in unison, which in turn shone the spotlight on CFOs and CROs, whose unique ability to tackle these new challenges gave them much more decision-making power.
This has meant the role of CFOs has become much more strategic and has made them much more ‘risk-aware’ of the financial needs of a bank. Data provision is a classic example of helping businesses better price the financial products they sell and hedge accordingly.
Reliance on data has not come without its downsides. Using models to measure risk has already opened up firms to losses and is unlikely to end any time soon, while the increased cost associated with maintaining and adding to the data available is an additional cost that many firms are still coming to grips with.
Regulation has also caused banks to maintain their own data stack and require an investment in technology. This has been made harder given banks typically have to work with legacy technology and must marry that with newer, nimbler systems.
This has brought CFOs more up to speed with the latest technological developments and has seen them develop teams with a stronger, more integrated culture between IT, risk and finance teams.
Forging those different working groups together in theory helps disintegrate individual teams and allows banks to make quicker and more sophisticated decisions around the information taken from large datasets, allowing the future relationship between risk and finance to blossom.
The hope is that, under this new structure, banks will be much better equipped to deal with any future financial crisis. Banks that fully embrace risk-aware finance from a structural, technological, data management and strategic perspective will be in better shape to withstand that crisis when it comes.