Spending on risk management solutions continues to be on the rise entering the new millennium. As Y2k spending and worries decline, financial institutions are looking to increase their risk coverage and are moving toward new functionalities in vendor supplied solutions. Two recent reports by The TowerGroup and Meridien Research set forth these positive predictions on risk spending and estimate the increasing share of the IT budget that risk is garnering.
The TowerGroup report estimates that enterprise risk management spending will experience a 16% overall growth rate during the next five years. "The growth is going to be pretty fast overall, with an increasing proportion of that directed toward vendor supplied solutions," says Richard Roby, director of research at The TowerGroup. He explains that changes in market conditions and abnormal market behavior during 1998, particularly in Southeast Asia and when the Russian ruble collapsed, have opened the door for greater accuracy and functionality in risk analysis.
The focus appears to be shifting from stand alone market risk analysis to integrated solutions addressing credit, liquidity and operational risk. "What's driving the vendors now and will be driving them over the next few years is the need to be able to quantify and integrate credit risk and market risk," notes Roby. "You can't measure market risk in a vacuum any more, you have to be able to get a handle on what your exposure would be when markets exhibit extraordinary behavior."
Deborah Williams, research director at Meridien Research, agrees that risk spending is increasing, especially in the area of credit risk analysis. She breaks down credit risk solutions that institutions are looking for and vendors are working to supply into three major areas: the determination of credit worthiness, exposure calculations and managing counter parties in a portfolio framework. But she cautions that vendor solutions still have a way to go before they can successfully address the credit risk analysis thoroughly as well as the integration of credit, liquidity and operational risk. Meridien's study of 500 financial institutions estimates the growth of risk spending at 18% for enterprise market risk, 19% for enterprise credit risk, 8% for desk level risk, 12% for Asset Liability Management and 12% for global limits systems.
In terms of dollar amounts allocated to enterprise risk spending through 2005, the TowerGroup estimates an increase from $1,460 million to $3.5 billion. Of the total IT budget amounts, spending on external vendor solutions is estimated to rise from $620 million in 1999 to $2.4 billion in 2005.