The Finance and Risk Integration Challenge for Banks
Today’s financial institutions face a highly structured work culture and a seemingly never-ending barrage of new regulations such as Basel III and accounting standards such as IFRS 17.
A solid Finance & Risk (F&R) data integration enables an organization to respond with greater agility and at lower cost to a rapidly changing regulatory environment. The F&R data integration is part of the functional data flow Zanders advocates, focusing on the inclusion of end-user knowledge in the set-up and design of the data landscape.
At many banks, Finance and Risk departments use the same raw data as inputs for most of their models and reports. However, data gaps, differences in timing, varying levels of enrichment and differing reporting requirements lead to time-consuming reconciliation between the two departments. Furthermore, management accounting often draws from a set of financials that is neither in line with Risk or Finance, creating inherently flawed reports upon which senior management bases its business steering decisions. With regulations driving the traceability of and consistency between F&R figures, the internal focus on integration on F&R increases.
Primarily, the short-term needs of adapting to the most recent set of regulations has taken priority. This has been largely responsible for the continuous postponement of data integration, which has resulted in a data landscape that is limited to a single functional perspective, minimizing the overall added benefit to the company and increasing the misalignment of end results.
Additionally, the capital expenditure associated with such a labor-intensive project, combined with the logistical challenges of aligning all stakeholders’ interests, have only further heightened barriers to adoption. As principles-based regulations become the norm, it is already necessary for significant intra-organizational collaboration to establish the consensus on the modeling choices and assumptions used in reporting.
Functional data management solution
An integrated Risk and Finance platform could solve these problems, while also “future-proofing” firms’ data management practices to a large degree. Zanders advocates a data landscape structure that tackles these issues and provides insight in the advantages of integration, as well as the changes needed to implement such a platform.
Many financial institutions do see the potential value in such a platform, but a brief look at the market today shows that the vast majority have not been able to implement a practical working solution.
An answer to this problem can be found by applying functional data management when redefining the data landscape. Functional data management implies having the knowledge of the end-user available in the process of creating the data landscape.
The current gap between functional knowledge and technical knowledge creates misalignment and limits the benefits of the final set-up. This will still require a tremendous effort from the organization, but once implemented it will be able to adapt to new regulations without the set-up of a new data landscape.
Single source of truth
Alignment of all relevant stakeholders and end-users lies at the foundation of an integrated Finance and Risk data infrastructure. The integration requires a Single Source of Truth (SSOT), a data hub containing all data ensuring no timing differences exist between creation of reports and no reconciliation mismatches. For more details on the requirements of an SSOT, see the aforementioned FDM paper. Such an integration of data processes significantly enhances a company’s ability to rapidly adapt to new regulations as well as build, validate and implement models in a fraction of the time.
The most significant success factor is the initial alignment of all users and relevant parties. This involves all groups who will not only be responsible for the design and implementation of the new system, but also all those who will be using it. It ensures that the major requirements of all stakeholders are voiced, recorded and addressed during the design of the SSOT. The SSOT will be the foundation of all risk and finance data within the organization.
Zanders track record
Zanders has been involved at different stages of multiple data projects over the years, expanding our track record. One example of this saw Zanders undertake a Finance and Risk integration project at a large Dutch bank with a goal to establish two large data warehouses for savings and mortgage contracts. This enabled data to be accessed by Finance, as well as for building risk models by the ALM and credit risk departments.
The result of creating a fully integrated Risk & Finance SSOT ensured that overall balance sheet items reconciled with aggregate contract data. The most valuable lesson learned has been that centralising Risk and Finance streamlines modeling efforts and simplifies reporting.
Interested in a chat regarding the integration of Finance and Risk data? We are open to exchange experiences and to advise on a future proof solution!