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B I A T E C

B A N K C O N T R O L L I N G

Management control system


in banks
Zoltán Zéman1, Roland Gacsi1, János Lukács2, László Hajós1

Banking and financial sector controlling is a dynamically growing area of the controlling
methods used in organizations. The difference between bank controlling and the standard
controlling methodology is defined by the specific tasks and products, banking transactions
(e.g. cash-flow, credit and capital investments) as part of the banks’ value creation process.
Management tasks of the banks are provided by integrating two well-defined sub-fields (con-
trolling functions of the bank’s internal operation and service). This integration can only be
achieved by linking planning, plan-fact analysis and information service functions together.

1 Szent István University, Faculty of 1. INTRODUCTION cess to reach the operative and strategic targets
Economics and Social Sciences The Arthur Andersen & Co. published a study of the bank.
2 Corvinus University, Faculty of
Economics called “Decade of change – Banking in Europe –
the next ten years”, in which 600 reputable leaders 2. THE CONCEPT AND TASKS OF BANK
of banks, financial institutions and businessmen CONTROLLING
shared their opinions about the development of Basically bank controlling means there is good
the European Banking System. Summarizing the harmony among profitability, growth and risk-
answers for one of the questions such as – What taking factors. It embraces the fields of manage-
do you consider the most important factors of ment, planning, balance-income analysis, bank
a bank’s successful operation? – we can make calculation, control, coordination and organiza-
the following ranking: qualification of the bank tion. Western banks’ controlling concept – includ-
management (controlling role), bank marketing, ing banks in Germany- uniformly based on this
quality of the management information (control- concept, certainly it means there can be differ-
ling role), installation of modern technologies, ences between the techniques used by banks
innovation of banking products and services, to put it into practice. All these statements show
competitive cost structure (controlling role), risk that controlling is a philosophy and a way of
management (controlling role), prominence of thinking, which can be extended to the decen-
the strategic planning (controlling role) and eq- tralized management area also through informa-
uity endowment. tion management. Thus bank controlling is able
Among the above mentioned points it is es- to become a management information centre.
sential to have extensive information system with We could have met several different definitions
a logical structure, which is provided by a well es- regarding controlling, while we were reading
tablished controlling system. the literature; from which one of the them gives
The “oversupply” of the banking services – with a clear definition and covers bank controlling and
the expansion of the market economy – has led its role in banking control the best (Péter Horváth).
to a competitive pressure among the domestic “Controlling is – from the functional point of view
banks. Certainly the widening of the banking – a management subsystem, which coordinates
services meant higher risk factor for the financial planning, control and information provision”. This
institutions. definition can be built in a commercial bank’s or-
The direct consequence of this strong change ganizational and operational system.
of the market conditions was the need for infor- First and foremost we state that the main tasks
mation. It is difficult to answer questions like the of controlling just like in every other field, are ac-
following without proper information: tual and only because of the special nature of the
• which bank product has the highest cost reco- “product” (in bank controlling the product is the
very level? different banking transactions such as cash flow
• whether all branches are profitable? management, lending, investment etc.) its role
• which banking division is the most profitable? can expand and develop according to the bank-
As a result of these, the decision-makers need ing sector.
an information base to be created including rel- Main tasks and functions of bank controlling
evant details and numerous decision variations; are the following:
to have better adaptation to the market. a) Improving accounting system towards mana-
If we look at it from a different perspective we gement accounting
can state that – also as a result of the strong com- b) Planning – strategic planning and operative
petitive situation – it is time to transform the plan- planning
ning system which can follow the quick changes c) Plan-fact analysis -cost analysis, income analy-
of the market conditions thus it provides the suc- sis, risk analysis, expected future trend analysis

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d) Information provision: managerial information Table 1 Subdivision of banking services


system development of reporting system with
an appropriate IT support. Description Own organization Foreign organization
These controlling tasks and their weights de- the service centre is cooperation partner
Centralized
pend on the size of the bank, its profile, the size the bank centre in bank centre
of its network. We distinguish centralized and representative bank relations
Decentralized
decentralized tasks. The ones that focuses on the branch-network financial market agents
whole bank and the coordination, integration of
the different activities on its various fields are con-
sidered to be the centralized controlling functions and opportunities; in other words it tends to
which basically synchronize the active and pas- ensure -through the market strategy- the opti-
sive business activities. We talk about decentral- mum utilization of the bank return potential,
ized controlling functions in case it targets only • structural balance management: it examines
a part of the bank at a given planning period. risk factors and return requirement depending
Certainly the size and function of a bank or fi- on the balance structure; to achieve long-term
nancial institute plays a crucial role when judging financial balance.
centralized and decentralized controlling tasks.
Centralized controlling tasks can be found in Portfolio management
small and medium sized banks. Within this framework becomes essential to
We summarized the banking services as the define the market strategy originating from the
degree of centralization/decentralization (see banking product structure. Behind all these stands
Table 1.) an important target such as the yield potential
Below we continue summarizing the different and securing the bank’s long term competitive
controlling activities of centralized/decentralized position. Such strategic decisions become neces-
tasks. sary like the bank’s security policy which defines
• Centralized tasks: developing business policy, the content, circle and quality of the output ac-
profitability and risk analysis, profit requirement cording to three aspects: selection of banking
calculation, expenditure plan calculation, sys- services, quality of services, depth and level of
tematic evaluation of target theme implemen- detail of services.
tation, development of integrated plan-fact The starting point of defining product selection
controlling system, developing business policy is to decide how wide the bank is willing to con-
alternatives, developing managerial informa- tinue the three main banking activities (cash flow,
tion system lending, capital market operations).
• Decentralized tasks: developing decision orien- Regarding the quality of banking services, the
ted mentality, decentralized expenditure plan, main aspects are: security, reliable, discretion, speed
implementing certain planning and controlling and the individual execution of banking services.
tasks, regulation of information process The banking services program is made up of
the (more or less) strongly differentiated of the
3. STRATEGIC AND OPERATIVE BANK recommendation of different service groups.
CONTROLLING After establishing the business policy the next
The two-level or two-step management meth- question is the way of mediation – known as
od of the controlling activity can be achieved distribution policy – namely the transmission of
through strategic and operative bank controlling. banking performances to the consumers.
This closely linked “two-step planning” gives the
integrated bank concept. On the first step basi- Balance structural management
cally is the outline of the bank’s overall compre- Here takes place the evaluation of the balance
hensive strategic objectives – as the market risk sheet structure in the sense of risk to partly or
and opportunity – and also the risk policy targets completely eliminate the different banking risk
and structural profit requirements. factors. We distinguish active and passive security
As a second step – particularly balance sheet activities in order to localize both liquidity and
structure optimization – the operational man- profitability risks. The previously mentioned defi-
agement of profitability and liquidity are defined nitions and their contexts are summarized in the
through plan-fact budget control system. following (Table 2)
So the strategic controlling activity regarding
the bank as a whole deals with only developmen-
tal, structural and security issues; mostly with the Table 2 Bank risk factors
balance sheet structure risks, market risks, struc- Possible Typical bank risk factors
tural yield options, growth potentials. security policy
aspects Profitability Liquidity
a) strategic controlling
Active security evaluation of activity from the aspect of risks
The strategic controlling contains the following
policy hence self-regulation through thresholds
subfields:
• portfolio management: takes into considera- Passive security
policy
dispositional equity dispositional liquidity
reserve reserve
tion the transaction structure, market structure

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The two basic aspects of risk management and 5. BANKING ORGANIZATION QUESTIONS
security are: IN THE CONTROLLING ACTIVITY
• the key issue of bank risk management is the We can broadly define controlling as the informa-
structure and form of the bank’s balance sheet tion centre of management, where management
• from the aspect of the bank’s profitability bea- knowledge is collected, grouped and transmitted
ring capacity the key is the size of the cumula- in a way to make it possible for the different areas
ted risk factors of banking activities to harmonize them with its
main targets.
b) Operative bank controlling
While strategic bank controlling (portfolio and bal- Controlling approach to bank structural
ance structural management) is a comprehensive, requirements
global management mode ergo outlines business Since we talk about the whole management
policy of the bank; the operative (budget manage- approach, it is essential (to be implemented) to
ment) concretizes these objectives. So budget man- develop the internal infrastructure. One hand it
agement is an integrated, operative management requires a controlling mentality, orientation on all
tool for bank management to break down the gen- bank management levels, on the other hand it is
eral targets to the bank’s subfields, in order to make necessary to have organizational, planning and
them visible, tangible namely specific tasks. controlling prerequisites. Without these income
It is quite important to divide the comprehen- oriented management cannot be created.
sive balance- and outcome targets (defined by the Such a bank structure is based on two principles:
portfolio and balance structural management) in
a unified, closed budget-plan and control system, a) Result-oriented aspect and action in the
into different areas of the bank so that the plan ful- bank hierarchy
filment of subfields can determine bank efficiency. In order to reach such mentality on all levels of the
Budget planning involves constant control, bank’s hierarchy (top-level, divisional level, level of
analysis and evaluation of the casual aspects of dif- professional details), it is necessary to place busi-
ferences in order to find out what kind of manage- ness policy in the center. Thus it is essential to:
ment activities needs to be used to follow the plan • develop a system of objectives that is broken
or whether the change of market conditions (un- down into all levels of management and result
foreseen) requires modification of the original plan. oriented
• monitor employees (departments) – with de-
4. BANK LEADERSHIP ORIENTED cision making authority – decisions’ impact on
ACCOUNTING bank results
Essentially the accounting system of the banks is • result oriented assessment and support of em-
an information system which aims to satisfy both ployees (departments)
internal and external information needs as much
as possible. Bank accounting systems are based b) Fostering the evolution of the result-
on the Accounting Act, the accounting rules for fi- oriented aspect such as the internal
nancial institutions, tax legislations and (as a result infrastructure
of the international nature of the financial institu- This results some requirements on the following
tions and obligatory of the audited balance sheet) levels:
on the generally accepted accounting principles. • Customer-, profit-oriented organization, where
The specifications of bank accounting arises clear task and responsibility allocation of bank
primarily from the “uniqueness” of accounting, fields’ contribution to the outcome can be con-
bank balance structure and also from accrual and stantly followed.
detection. So that formulation of these factors • Integrated, closed planning and evaluating sys-
should be used as basic requirements. tem, based on the same plan and control, which
When developing a leadership oriented system, ensures that differences can be – as a result they
the following tasks must be met in a bank: do not arise from methodological differences
• against the traditional cost-income aspect, ex- – analyzed, evaluated, influence and controlled.
penditures and incomes should be grouped • Efficient and flexible information system used
according to return-input; to be able to measu- for managerial decisions as they are always
re efficiency. only as good as the quality of their supporting
• we must separate costs into types and location information system. We need to keep track of
of costs existence of the organized and clear-content
• fixed and variable costs must be defined for dif- accounting system. So that the reliability of the
ferent functions internal bank accounting is essential from the
• ensure resolution of details that allows the de- controlling activity perspective.
veloped bank controlling system’s planning
and management information system to be Organization position of the controlling
updated activity
• distinguish transactional and operational bank The controlling function requires two fundamen-
activities and the related accounting procedu- tal questions to be clarified, from one hand to
res decide about the hierarchy level along with the

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question whether controlling should be a direct tion, entrepreneur, budgetary institutions etc.).
crew (body) department or it should be added to Each of them requires different strategies.
the bank organization as a so called branch de- d) Types of competitive factors
partment. From the other hand it is also impor- Factors such as quality and quantity of the
tant to clarify the question of delegated authority services, price competition, availability, pro-
of command to controlling. motions and public relations play an impor-
The decision about which level controlling is tant role.
dedicated to, in the organizational hierarchy de- e) Is there an adequate situation for technological
pends on mostly how deep are those changes environment?
that are required to install bank controlling. Basically the banks’ current situation are defi-
ned by communication systems and informa-
6. CONTROLLING PLANNING AND CONTROL tion technology. The more innovation are in-
(GAP ANALYSIS) SPECIAL PREVALENCE IN troduced, the more old products disappear.
THE BANKING SECTOR The strategic plans do not end with the outline
Planning and control have to have a strong cor- of a long-term action plan.
relation because the only possibility for manage- The following standpoints must be met:
ment to act in time are the well developed appro- • the values (given when outlined goals) must be
priations and actual data during planning. relevant, accepted objectives must be measu-
The functions of planning –in banking terms- rable, verifiable, degree of the differences and
are the following: completion should be definable exactly,
• Information and documentation function: • plans must be feasible, motivating and must
have written records of the goals to be achie- not be frustrating.
ved set by the organization Strategic planning in banks is used on the high-
• Coordination-integration function: coordi- est management level, broken into periods. During
nating the activities of the different bank areas strategic planning different analytical methods are
in order to make the operation of the organiza- applied such as the SWOT analysis or gap analysis.
tion more efficient.
• Incentive-motivating function: the organi- b) Operative planning and accounting
zation sets living goals and rewards their com- in banks
pliance and sanctions failures. In case these The operative plans can provide clear guidance
individuals, groups are also taking part in the –for those who are in charge of realization – for
planning process then their commitment to next year’s activity. The definition of responsible
the developed plan would greatly increase. units and target value is completed during op-
The more complex the organization is, the high- erative planning. The responsible units must be
er the formalization of the planning system gets. separated in a way that the unit manager could
The necessity of the formalization of planning is in- influence – with dispositive decisions – the im-
disputable both in theory and practice but the ap- plementation of the plan, compliance with the
propriate degree of formalization is controversial. budget and also to be responsible for these.
Formalization must not increase time investment The most common responsible unit in banks
and expenditure and limit flexibility significantly. are the following:
Time dimensions, content and forms of bank • branches, as independent and spatially separa-
planning accounting. ted units, normally called as profit or investment
centres.
a) Strategic planning • line of businesses, as strategic business units
When developing the strategy, the following with their own incomes and costs
factors needed to be examined: • units with central functions, called cost-centres
a) Market of financial services • individual projects, called investment centres
The bank has to measure what services, at Annual planning has a significant role in a way
what price can be found currently on the that it reveals the feasibility of the strategic plan.
market and accordingly determine its servi- Therefore the strategic plan can be reconsidered
ces. It has to measure its current activities and if the annual plan seems have difficulties.
their growth scenario and consider the op- To conclude, contently based operative plan References:
Andersen A, 1986: The decade of
portunity of developing new products and can be only backed by the strategy. Otherwise it change : Banking in Europe :
their introduction to the market. would not be clear on what path the bank goes the next ten years, Lafferty
b) Who are the market actors, current and future on. According to the special banking activities Publications.
Horváth P, 2012: Controlling, Verlag
competitors, potential allies? we can emphasize the main controlling fields re- Franz Vahlen GmBH.
Actors must be interpreted broadly because garding to planning are: financial controlling, cost Körmendi L. – Tóth A., 2002: The
there are other organizations beside com- controlling and result controlling. Management scientific and practical approach
to controlling, Publisher Perfekt.
mercial banks such as insurance companies, tasks of the banks are provided by integrating Mabberley J,1999: Controlling of
savings banks, specialized financial instituti- two well-defined sub-fields (controlling functions Financial Institutions, Panem.
ons and financial advisors. of the bank’s internal operation and service). This RAABE- Practical Controlling Guide,
c) What is their customer base? integration can only be achieved by linking plan- 1999: Budapest.
Zéman Z, 1998: The development of
Every bank has a unique customer base. We ning, plan-fact analysis and information service controlling in the operation of
can group customers in several ways (popula- functions together. Hungarian enterprises.

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