Operational risk management by the CFO in Finance, Banking & Insurance

Regardless of the sector of activity concerned, risk management is at the heart of the CFO’s job. In the world of finance, banking and insurance, this key employee must, a fortiori, ensure strong governance of operational risks. We take stock of these risks, their challenges and the levers to be activated to facilitate their prevention and management.

 

The CFO: role and missions

The CFO, Administrative and Financial Director, plays a key role in the company. He works very closely with the manager and is a member of the company’s management committee.

This specialist’s main mission is to apply the company’s strategic orientations on the financial level and is responsible for analysing and anticipating the company’s development. In other words, He manages the entire financial strategy of the organization, secures financial operations and actively participates in improving performance. He is also required to carry out cross-functional missions: legal management, administrative management, HR management, etc.

 

What are the operational risks in finance, banking and insurance?

In the financial sector, there are three main types of risks : credit risks, market risks and operational risks.

In financial institutions (banks, insurance companies, trust companies, etc.), operational risks are all risks related to direct or indirect financial losses that occur as a result of a faulty or inadequate internal procedure, system or practice.

Examples of operational risks in finance, banking, and insurance include:

• Internal fraud by a member of the financial institution (forgery, theft, insider trading, etc.);
• External fraud (cyberattack, robbery, forgery, etc.);
• A flaw in internal practices;
• A breach of an obligation;
• A cessation of activity;
• Internal systems malfunction;
• Damage caused to tangible assets (fire, flood, vandalism, earthquake, etc.);
• A lack of internal control;
• A procedure is secure;
• A malicious act;
• A computer or electrical failure;
• Inadequate HR practices (failure to comply with occupational health and safety rules, etc.);
• Inadequate business practices;
• …

 

How is the CFO a key player in operational risk management?

In mid-sized companies and large financial groups, operational risk management is most often the responsibility of the internal control department or the risk manager. However, in SMEs and VSEs, this highly responsible mission is generally the responsibility of the CFO.

Indeed, thanks to his solid expertise, his multiple skills (legal, financial, administrative, HR, accounting, etc.) and his transversal vision, the CFO is able to steer the forecasting, management and control of operational risks.

 

What are the challenges related to the management of operational risks by the CFO?

Operational risks can, if they are not properly anticipated and controlled in time, have harmful consequences on the proper functioning of the financial institution, on its cash flow, on its customers, on its reputation, etc. These risks can quickly threaten the company’s sustainability, as proven by the precedents of many banking institutions such as the Barings case.

 

How to manage operational risks as a CFO?

Faced with these major challenges, it is therefore essential for the CFO to ensure continuous rigorous control to anticipate these risks.

The procedures to be deployed to limit these risks have been standardized by the Basel framework, which offers a framework dedicated to securing risk management in financial institutions. This text defines several good practices to be deployed, the proper implementation of which is then evaluated and monitored by the national financial regulator.

Among these good practices, we can mention the implementation of a risk management system approved by the Board of Directors and subject to internal audit by independent staff. This system must be applied at all levels of the banking institution in order to allow each employee to identify his or her role and missions to contribute to the management of these risks. Operational risk management procedures and policies will also need to be applied to the financial institution’s products and services.

In addition to these regulatory principles, the CFO can also establish and maintain a real risk culture within the institution, and encourage each player in the organization to be vigilant on a daily basis.

 

In the event of a delicate situation, it will be necessary to quickly identify, assess, monitor and finally mitigate the operational risk encountered.

Finally, using an external financial specialist, such as an interim CFO, can allow for a very accurate risk assessment and preventive measures.

At WAYDEN, we are able to assign an interim CFO experienced in risk prevention and management in the finance, banking and insurance sectors from our pool of 8,000 seasoned interim managers.