Why is risk and finance integration the need of the hour?
With risk and finance functions in most financial institutions being fairly siloed, obtaining an integrated and granular view of business-critical parameters is often a challenge. Integrating these functions can help financial institutions:
- Improve access to relevant information for decision-making, risk and capital management, financial reporting, and regulatory compliance
- Increase transparency for better understanding of performance, risk, and capital at the business unit, product, and portfolio levels
- Make accurate business decisions that reflect real risk-adjusted returns and are based on a deeper understanding of business profitability, in a timely fashion
- Mitigate operational, compliance, and reputational risks
What is the essence of such an integration?
At the strategic level, an integrated view of risk and finance can be visualized from three perspectives:
- Business view: This includes the integration of business processes with risk-adjusted performance measures such as risk-adjusted return on capital (RAROC), economic capital, economic profit, risk-based pricing, capital allocation, and integrated decision-making.
- Application view: This refers to the integration of applications in risk and finance areas. Organizations can follow two approaches in this regard:
a. Overhaul of all existing systems and processes; replacing them with a single suite of applications for both functions
b. Rationalization of existing systems and processes to achieve integration
- Data view: An integrated data view seeks to combine the commonalities between the requirements of risk and finance, both at aggregate and granular levels.
Will it be a cakewalk?
No. Financial institutions are bound to face some challenges while attempting to integrate risk and finance functions, such as:
- Lack of clarity on approach and end-state operating model
- Lack of coordination among stakeholders of risk and finance divisions
- Complex data and IT landscape
- Organizational resistance to change
So, how should organizations approach this?
To embark on this integration initiative, organizations should:
- Identify process and system overlaps across risk, finance, and regulatory compliance areas, to weed out redundancies across business processes, functions, and applications well ahead in time.
- Design the integrated business, application, and information architecture after a thorough analysis of the gaps between as-is and to-be states.
- Chalk out an implementation roadmap starting with the creation of a common data repository that will serve as a single source of information for all risk and finance functions, including accounting, risk management, capital adequacy, liquidity, and disclosures.
- Institute program governance mechanism by way of a joint steering committee comprising the chief risk officer (CRO), chief financial officer (CFO), senior risk and finance executives, and board members, to ensure alignment of business processes to program objectives. A cross-functional task force focusing exclusively on this integration should support the joint steering committee.
In todays dynamic business environment marked with evolving regulatory changes, financial institutions will need to bring strategic initiatives like the integration of risk and finance functions to a successful fruition to improve the efficacy of the decision-making process and ensure profitable sustenance. How organizations combat challenges and deploy a winning strategy is yet to be seen, but we believe that technology can assume a greater role than just being an enabler; it could well be a strategic tenet to the program.
Please read the entire paper for our in-depth analysis on the subject, Risk and Finance Integration A Necessity or Nice to Have?, which includes interesting insights from our subject matter experts, Zeeshan Rashid, Shyam Sundar, and Dinesh Darak from TCS BFS business unit.