Market and economic volatility has combined with regulatory and commercial pressures to create an exceptionally challenging operational environment that is often changing the way risk and finance work together and putting a premium on their effective coordination.
This world of "permanent volatility" is having a significant effect on financial services firms, with 94 percent of respondents in recent Accenture surveys citing either a moderate or high impact on their organization. In three large-scale surveys conducted last year -- and in numerous one-to-one interviews with financial executives conducted since that time -- finance executives described their efforts to come to grips with this new and difficult environment. In addition to global economic pressures, banking, capital markets and insurance firms are often called upon to confront a wide range of new regulatory challenges related to privacy, anti-money laundering, improper payments and accounting standards while dealing with sector-specific regulatory packages such as Basel III and Solvency II.
On top of economic and regulatory concerns, commercial challenges threaten to swamp some financial firms. Some banks that once enjoyed high returns are now undergoing fundamental restructuring of business models as they try to adjust to business environments that make profitability harder to achieve. In the United States, the Volcker Rule -- the section of the Dodd-Frank Act that places limits on proprietary trading -- may have accelerated such trends, playing a part in a series of spinoffs and closures of hedge funds and proprietary trading units that previously were part of investment banks. Low interest rates may have created problems for the insurance industry as well.
Financial firms' chief risk officers and chief financial officers have cited the importance of greater coordination between the finance and risk functions. This need has become acute at many levels, as data, reporting and outputs can pull finance and risk together across operational and strategic decision sets. In fact, more than 90 percent of the financial firms surveyed by Accenture are implementing or planning better integration of risk and finance processes and information over the next two years.
Through survey research, interviews and our own experience with clients, we have identified six key things to consider as potential ways to help improve the CFO-CRO partnership and attain greater operational integration of risk and finance:
1. Establish integrated and shared data sources. If risk and finance are going to be independent, sometimes adversarial, and yet work together effectively, there is often little room for disagreements over basic facts resulting from using different data sets. Concentrating on solving data quality issues, including the development of shared data processes and systems, can be an effective way to reduce a common area of conflict and improve the risk-finance working relationship.
2. Jointly develop risk and capital models. Risk model development typically remains the responsibility of the risk function but, increasingly, in closer coordination with finance. Data fed into models often comes out of systems created by finance, and outputs from the models can in turn influence financial reporting.
3. Strike the right balance to promote interdependence and cross-leverage risk management and finance. A healthy CRO-CFO partnership can sometimes mean agreeing to disagree. It can be beneficial for risk to maintain the ability to push back against finance if commercial and risk objectives come into conflict. Independent CFO and CRO functions can actually provide a strong impetus for operational integration.
4. Give risk input into strategy. Even when working in close cooperation with other departments, allowing risk to retain its independent perspective can be essential.
5. Increase the value-added provided by the risk function. Many of the executives we interviewed agree that risk should go beyond a compliance role to focus on adding value to the business. Providing enterprise-wide risk input into management of operational, emerging and even strategic risks can be part of this responsibility.
6. Rotate personnel between risk and finance. Even if risk and finance personnel sometimes find themselves in opposition on an issue, speaking a common language and having common experiences can help enhance operational effectiveness.
As our research indicates, the CFO-CRO partnership is in transition, and given so much global uncertainty the partnership may continue to evolve. Increasingly, it is a partnership of equals, with healthy debate leading to mechanisms designed to produce the best information when decisions entailing trade-offs may need to be made.
Given economic, regulatory and commercial pressures, we may see greater integration of risk and finance. The bigger question could be whether such integration helps develop and enable business models than can restore and maintain profitability in what may be an environment of continuing volatility.
Paul Boulanger is the managing director of the Finance & Enterprise Performance consulting group at Accenture, a global management consulting, technology services and outsourcing company. Steve Culp is the managing director of Risk Management services at Accenture.
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