Strength Under Fire in Risk Management: New Realities, Technology Imperatives, and Investment Spending

by Cubillas Ding, February 21, 2012
Industry Trends
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Globally, Celent expects firms to spend in excess of $35 billion in 2012 on core risk management and risk-related regulatory compliance. These constitute a significant part of total technology spending across banking, insurance, securities, and investment management sectors in North America, Europe, and Asia-Pacific, growing to $50.6 billion in 2015.

As the financial services industry descended into the credit crisis in 2007/2008, Celent published a report highlighting capabilities required to navigate new realities for financial firms. (See the Celent report Managing Risk and Compliance: Responding to New Realities.) Five years on, the tenets presented in that report still hold true, but further imperatives have appeared.

In a new report, Strength Under Fire in Risk Management, Celent examines the strategically imminent themes coming into play in relation to operational trends and risk technology investment spending. Changing industry drivers and regulatory developments potentially constitute “game changing” mid-term to long-term dynamics that Celent expects will shape and drive how capital markets firms and financial institutions architect next-generation technologies, execute to risk management initiatives, and monitor/manage potential exposures on a business as usual basis.

“Despite hard-pressed investment conditions, risk and regulatory delivery programmes are expected to receive sustained spending due to the mandatory drivers to 'fix a broken financial system,' and to sharpen systemic risk management at firm and industry levels,” says Cubillas Ding, Research Director at Celent and author of the report.

Not surprisingly, spending around financial risk management (market, credit, ALM/liquidity, and counterparty risk) constitute the majority proportion, at greater than 65% of overall investment. Areas related to nonfinancial risk (such as AML, financial crime, collateral management, ERM, operational risk and compliance, and regulatory reporting) are expected to garner 24% of total spending in 2012.

The strategic value of scale, distribution and technology/infrastructure will grow dramatically, and hence, financial firms (and the solution providers that service them) will need to invest in these areas. Moreover, firms need to achieve superior levels of agility and capitalize on cost efficiencies in order to gain sufficient operational leverage to thrive in the new world.

From a financial risk management standpoint, liquidity, balance sheet strength, and the ability to actively manage these resources effectively will be a key differentiator. There is already substantial differentiation in funding costs between institutions that investors consider weak (especially those in countries with sovereign difficulties) and stronger institutions. Celent expects that banks with financial strength and spare liquidity, enabled by strong technology acumen to exploit risk and manage the use of capital, will pick up market share.

The report analyzes the top trends in risk management and the outlook for risk technology spending in light of shifting industry dynamics, capital/liquidity regulations, derivatives reforms, and the evolution towards a renewed financial system, one predicated on new ways of operating based on transparent, electronic, and real time infrastructures at a firmwide as well as industrywide level.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Business Outlook and Risk: Bracing for Headwinds and Stormy Conditions

6

Risk Technology: Top 10 Themes, Catalysts, and Imperatives

10

 

Theme 1: Regulatory Response Pressure

10

 

Theme 2: Hot Off the Basel2.5 Burner, Basel III Will Kick in Another Cycle of Investment

12

 

Theme 3: Efficient Collateral/Margining Operations

13

 

Theme 4: Optimized Collateral Placements

14

 

Theme 5: Extensive Demands for Real Time Risk Pricing and Accurate Valuations

16

 

Theme 6: Dynamic Pricing and Counterparty Risk

18

 

Theme 7: Legal Entity Identifiers

20

 

Theme 8: Integrated Treasury: Capital, Funding, and Liquidity Management Practices

22

 

Theme 9: Towards a Combined Approach for Managing Capital Markets Data Across Finance and Risk Functions

24

 

Theme 10: Under Severe Pressures, Firms Will Operationalize Risk Management Practices to Address the “Risk and Business” Disconnect

26

Risk Management Capability Curve and IT Spending Outlook

29

Looking Forward

32

Appendix

33

Leveraging Celent’s Expertise

34

 

Support for Financial Institutions

34

 

Support for Vendors

34

Related Celent Research

35

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