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The complex puzzle of integrating finance and risk in banking

18 June 2021

On 9 September 2008, the financial world was turned upside down. In a single day, American bank Lehman Brothers lost 45% of its stock market value. Given the dense interconnectedness of the global banking system, this was bad news not only for Lehman Brothers but for peers worldwide.

“When Lehman Brothers collapsed, all boards of directors immediately wanted to know: ‘What is our total exposure to Lehman Brothers at this time’,” Van der Windt explains. “As it turned out, there was no full oversight. Of course they could give an approximation, but it was far from up-to-date because these reviews only took place on a monthly basis.”

We now know that it was too late to avoid the approaching iceberg. The entire banking world ended up in a deep crisis, and after the shards were somewhat gathered – with the help of many billions of public money – one thing was clear: this should never happen again.

This in turn sparked a wave of new laws and regulations with the aim of curbing risks in the sector.

One truth

New regulations require, among other things, that banks maintain larger buffers, but also that they have a better overview of their own financial position and the risks associated with their portfolio. “That means that banks must have real-time overview,” Van der Windt explains. “The crisis had clearly shown how much can change in a day. A monthly review no longer suffices.”

Perhaps even more important, however, is that banks have one overarching view of the entire organisation. “That’s where the integration of finance and risk comes in. The distinction is still there, of course, but it’s converging Traditionally, you had two streams: one went through the entire finance department and one went through the risk management department, and sometimes different insights came out of that. Nowadays, that is a no-go. It’s essential that finance and risk work with the same data. There has to be one truth.”

Van der Windt emphasizes that the need for better insight does not come solely from watchdogs. “Regulators are definitely an important driving force, but the banks themselves also have an interest in having an up-to-date and unambiguous insight into their own organisation and customers. Having your data in order offers other major advantages such as cost-savings, a better grip on your organisation, and the tools to improve customer service.”

“Hell of a job”

So it all starts with a single, unambiguous picture of the entire bank. While this may sound simple, for large banking organisations it can safely be called “a hell of a job,” Van der Windt assures. “Such transformations can take years. The complexity is enormous. You have to understand all the different silos and different business lines as well as be able to bring them all together practically and technically. And then there’s also the change management component.”

Banks deal with many different systems and data types. “A loan to a small business is a completely different product (with a different set of data elements) than a large interest rate swap. But at some point, at the head office level, they do require one report that tells something unambiguous about the finance and risk position in as much detail as possible. So then you have to start opening up all those systems, and make sure you can connect the dots.”

And that’s only between two disparate products: banks usually operate across hundreds of different instruments. “If you include all the main categories and all their flavors and sub-flavors the picture is clear: they oversee a tremendously broad palette of products.”

Then there is the reporting minefield. “Not every reporting requirement applies to every product, so as a result you have all kinds of cross-sections: ‘these only apply to these products, and these again to those’. That means that employees within the different product groups have to be well aware of dozens of reporting requirements.”

Power to the people

It is very important that there is transparant communication throughout the chain, such as between the finance and risk departments on the one hand and the business lines on the other. “The person who provides the data – the data owner – must ensure that he delivers the right thing and in the right way. But the person who, for example, records that interest rate swap for that financial institution cannot always see the implications of his recording for all those different reporting obligations. There is definitely an field of tension.”

This is where the change management aspect comes into play. “Linking the various systems and data together is functionally and technically challenging. But you also have to make sure that all people embrace the new way of working. They have to record everything correctly. And as with any change process, it certainly does not always go without a struggle.”


It’s clear that banks already have their hands full to achieve unambiguous reporting for the entire organisation. They often seek external support – and Varrlyn is a go to expert in the field.

“In addition to capital markets, we have also focused emphatically on the finance and risk domain for about five years now,” says Van der Windt. “We help banks with all facets in integrating the two.”

“They are challenging but also fun projects. We have our feet on the ground with the various business lines and speak their language. We bring in functional and technical expertise and support the change management component. We are now quite adept at that. We have really managed to get a number of processes running smoothly that had stalled before our arrival.”

The next crash

Going forward, the domain will remain a key area of focus for the firm, because there is nothing to indicate that the deluge of new rules will end in the short term.

“A second credit crisis is not the only thing that must be prevented. We also have to deal with global warming and other problems, of course. And there are also more and more rules for this – the EU taxonomy for sustainable activities, for instance. Banks can also fall due to significant exposure to climate risks, so it is important to have a good overview of your environmental footprint as well.”

And finally, the “traditional” dangers have not disappeared either. “Stock prices are shooting up again. The parallel with the 2008 crisis is already being made. The sector suspects anomalies somewhere, but no one can really pin point the exact risks. In 2008, it was the mortgage-backed securities, nobody had their sights on the phenomenon. And now there may be something else that we are overlooking.”

Fortunately, the blow might be a little softer this time – Van der Windt reassures. “Thanks to the new rules, banks are certainly in a much stronger position. If something comes up, they will be able to absorb the blows better. But as soon as it becomes clear where that weak point where things went wrong again, there will undoubtedly be all kinds of new reporting rules to close the leak.”