“A CFO-Led Resilience Plan for Global Banking”, by Boston Consulting Group (BCG) outlines the critical role Chief Financial Officers (CFOs) should play in enhancing the resilience and performance of banks in the face of increasing regulatory requirements, external risks, and rising costs. The article emphasizes the need for CFOs to lead organizational transformation to ensure long-term resilience and risk-adjusted performance.

You can read and download the full report on BCG website or NeoForm’s LinkedIn page.

Below is a summary of the key points and recommendations:

Key Points:

1. Context and Challenges for Banks:

• Basel IV Regulatory Framework: Banks, especially global systemically important banks (G-SIBs), face stricter capital requirements, with minimum capital requirements expected to increase by up to 6% for G-SIBs and 5% for other large banks.
• Rising Costs and Risks: Banks are dealing with increasing costs related to personnel, regulatory compliance (e.g., ESG reporting), and IT infrastructure upgrades. They also face macroeconomic and political uncertainties, which could reduce earnings as inflation cools and interest rates decline.
• Need for Resilience: Banks must ensure they have sufficient capital reserves and risk-adjusted performance to withstand these challenges.

2. CFO’s Role in Driving Resilience:

• Risk-Adjusted Performance: CFOs need to focus on creating a culture of risk-adjusted performance across the organization. This involves setting measurable targets, improving transparency, and ensuring that all business units contribute to the bank’s overall resilience.
• Organization-Wide Effort: Past efforts to address risks, such as those after the 2008 financial crisis, often failed because they were siloed. CFOs must lead a holistic, organization-wide transformation to ensure sustainable performance improvement.

3. Measurable Targets:

• Performance Metrics: CFOs should define clear, measurable performance metrics that align profitability with risk-based capital. This includes allocating risk-based capital to business lines based on their risk-weighted assets (RWAs).
• Model Levers: Adjustments to risk models (e.g., optimizing collateral netting sets) can reduce RWA consumption without affecting clients or products.
• Customer Levers: Decisions on which customers to serve and which products to offer should be based on risk models. CFOs should allocate capital only to portfolios that meet the hurdle rate for earning the cost of capital.

4. Change Management Program:

• CFOs must create a comprehensive change management program to develop a performance-oriented culture. This program should be based on three operating agendas:
  1. Leadership and Change Agenda: CFOs need to win the support of senior leaders and articulate a clear purpose and strategic plan for the bank. This includes aligning the bank’s strategy with ESG goals and shareholder returns.
  2. Organization and Management Agenda: CFOs should work with senior leaders to adjust the organization’s structure, roles, and decision-making processes to ensure accountability and efficiency.
  3. Performance, Talent, and Enablement Agenda: CFOs must establish performance management systems, invest in strategic workforce planning, and ensure employees have the necessary skills, tools, and incentives to meet performance targets.

5. Key Initiatives for CFOs:

• Transparency and Communication: CFOs should prioritize transparency and communicate clearly with all stakeholders about the importance of the cultural shift and the bank’s strategic goals.
• Efficient Processes: Banks need efficient processes to adapt quickly to changing business outlooks and capital costs. CFOs should ensure that the finance department acts as a true business partner to the front office, with embedded analytical capabilities.
• Talent and Technology: CFOs must invest in talent development and ensure employees have access to state-of-the-art IT tools, data management skills, and regulatory knowledge. This will enable employees to act as ambassadors for performance-focused behavior.

6. Long-Term Resilience:

• By building a performance-oriented culture that is attuned to risk, CFOs can create long-term resilience for their banks. This will make the bank attractive to investors and stakeholders, bringing in additional capital and revenues that can be reinvested in technologies, tools, and talent to fuel further performance improvements.

Conclusion:

Authors underscores the necessity for CFOs to lead a comprehensive organizational transformation to ensure banks can meet rising regulatory demands, manage external risks, and achieve long-term resilience. By setting measurable targets, fostering a performance-oriented culture, and investing in talent and technology, CFOs can position their banks to thrive in an increasingly complex and challenging financial landscape.