Competition in the financial space is increasing at an unparalleled pace, and banks and other financial institutions are taking different measures to gain an edge. These include adding new processes, technology and talent to improve operations. A middle office is the most important for enhancing a bank's competitiveness, as it augments the productivity of front-office and back-office operations. However, merging middle- and front-office operations would not help. Some banks do not intend to have a dedicated middle-office department. Instead, they outsource all middle-office functions to a third party, reducing operating expenses.

What is a middle office?

The term middle office has been in use in the banking sector for a while. Middle-office employees generally sit between the front and back offices. Their main aim is to support front- and back-office employees. The front office is responsible for interacting with customers and generating revenue, while the back office is responsible for functions such as trade settlement/clearance, record/data maintenance and accounting. Middle-office employees manage a banks other tasks.

Middle-office employees perform tasks relating to risk mitigation, compliance and trade processing. They are also responsible for managing the information technology a bank uses. For instance, if a banks front-office employees contact customers to extend mortgage loans, back-office employees maintain records of active mortgage loans, and the middle office analyses the profit generated from the mortgage loans. If there are continued defaults on these loans, the middle office will inform the bank about it. Middle-office operations ensure financial control and play a part in strategic management.

Why middle-office activities are essential for banks

Front-office operations could result in a number of risks. A bank cannot remain competitive if the middle office does not mitigate these risks. For instance, if a banks front office has approved loans for multiple applicants and, on conducting research, the middle office identifies applicants who do not have a good repayment capacity, the middle office will notify front-office employees of the credit risk. The front-office employees may then cancel the extension of loans to individuals who cannot repay them.

Regulatory compliance is another challenge for banks in this competitive era. Middle-office employees ensure that all of a banks activities are compliant with the rules. They also focus on financial reporting, analysing profits/losses and helping the bank move in the right direction.

Conclusion

Middle-office operationsare essential for a bank to maintain continuity and competitiveness. Acuity Knowledge Partners helps banks with effective middle-office processes.