Introduction

Failures of large institutions across the globe over the past 2 years, were partly contributed to by the breakdown in communication between the risk manager, senior management and the boardroom. Whilst many financial institutions complied with the ensuing legislation by aligning risk and finance functions, the credit crisis highlighted that a silo’d culture still prevailed, even in such areas where risk and finance shared similar responsibilities. 

Key findings

• Who is driving alignment – Many regulatory bodies have issued legislation over the last decade to promote transparency and accountability, complying with these has aligned the two functions. The Board and CEO’s also realised that they must improve standards to protect their positions and investments.
• Current Relationship between Risk and Finance – There are inherent similarities between risk and financial employees. However currently there seems to be a preference for keeping the two functions separate, concentrating on their individual specialities and only coming together on tasks that regulators are requiring them to do so.
• Benefits –  One of the underlying benefits to a company of risk management that is fully integrated with finance, as well as the rest of the business, is that everybody has a sense of the institution’s risk appetite. Even traders become aware that they too ‘own risk’.
• Alignment of technology systems and IT – While there seems to be some IT and technical overlap at banks, currently this is still minimal. Though banks do admit to seeing benefits from some cost saving measures due to overlap, there does not appear to be any major changes to fuller alignment in the near future.  
• Future Trends – Many financial institutions appear to be opting for a middle ground, which moves the functions closer through greater collaboration on a number of tasks, using common processes and sharing goals, but whilst maintaining their distinctive roles, perspectives and skill sets.

Conclusion

Financial institutions that align risk closest will reap the benefits of developing risk and return oriented views of the business. This perspective will not only allow them greater transparency in day-to-day dealings and control processes, but this will also make financial and risk reporting and compliance a much easier task.

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