TowerGroup research estimates spending on risk technology will top $40 billion in 2005.
As Wall Street hunkers down to weather through not only the tight economy, but scandal and regulatory investigations as well, one area of technology spending continues to grow within the financial-services community. Risk management has been in the spotlight quite a bit in areas such as business-continuity planning and disaster recovery following Sept. 11, as well as in the less glamorous area of compliance following trading losses and theft at Allfirst and Lehman.
But the backbone of risk management for financial-services firms continues to be investment in technologies covering market, credit, liquidity and, now, operational risk. As spending in these areas continues to grow, even in these tough economic times, the integrated approach to risk management on an enterprise-wide level also continues to gain momentum and become the industry standard.
"There are great models in risk analytics that have been developed for certain verticals and engines that process different types of risks in different areas," says Guillermo Kopp, director of the financial-services strategies and information-technology-investments group at TowerGroup. "Now the trend towards enterprise-wide risk management is to provide an integrated view in a hierarchical fashion that provides a risk view across a firm." Kopp adds that the enterprise-wide approach to risk management and its resulting integrated view comes about through technology such as automated interfaces, data-extraction utilities, improved data warehousing and intelligent reporting within firms.
Obviously, in order to accomplish this enterprise-wide approach, firms are buying the technology necessary to get them there. But while this theory of an enterprise-wide approach has been hovering over the financial community for a while now, is the concept becoming a reality yet? Kopp says yes, the enterprise-wide approach to risk management is happening, especially in larger firms. "The enterprise-wide view for these firms is basically the data extraction, aggregation, analyses and reporting at a higher level," he says.
Kopp says investments in risk-management technology are centered on two main areas - risk modeling, quantitative-risk-analysis products and operational-risk technology. Some of the spending on operational-risk technology includes newer areas such as improved business continuity and, "more resilience in IT platforms and more robust information-security infrastructure," says Kopp.
"Risk management is at the heart of the core competencies of financial-services institutions, so this is like a survival strategy," he says. "If an institution fails to improve their risk-management capabilities, they run the risk of being dis-intermediated. They might find situations where the risk is too high, the capital requirements get too expensive and they may need to exit individual lines of business or even lose their competitive position in the market."
According to TowerGroup research, Kopp estimates that risk-management spending in areas of credit-, market- and liquidity-risk technology is expected to grow to approximately $21 billion in the year 2005. That number is up from the $18.7 billion that is expected to be spent on risk technology in 2002. And that $18.7 billion is about 7 percent of total spending on IT in financial services, which is estimated at $300 billion for 2002.
Those numbers do not take into account spending on operational-risk technology, which would add at least another $20 billion, says Kopp. This number includes spending on business-continuity sites, backup infrastructure and redundant pathways, as well as security technology including access-control firewalls, intruder detection and transaction-integrity products. "After Sept. 11 many institutions have purchased additional backup sites of one form or another and many have beefed up their operational resilience, which will continue moving forward," says Kopp.
According to a Recent Poll
on Wall Street and Technology's Web site, respondents confirmed the TowerGroup research and indicated that spending on risk-management technology is on the rise.
The question posed read, "In terms of overall spending on technology, what is the outlook for your risk-management budget in 2002 versus 2001?"
Sixty-eight percent of respondents indicated spending was increasing or increasing significantly, while another 28 percent indicated the spending was remaining the same.