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 News | January 6, 2009 |
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Op risk technology spend hits $16 billion
Banks and financial institutions globally spent more than $16 billion last year on third-party operational risk technologies, according to new research.
US analyst TowerGroup estimated that the development of Basel II programs among banks has led to specialised third-party operational risk solutions representing around 60 per cent of total spending on risk management technologies. According to TowerGroup, credit and market risk systems were the initial area of growth, with the newer field of operational risk management developing later.
However, according to TowerGroup analyst Guillermo Kopp, a vice-president at the firm, the sheer complexity of implementing Basel II technology programs on an enterprise basis across banks is forcing some tough decisions and illustrating the tension between compliance costs and business benefits. The expense comes mainly from the huge investment required to update and integrate legacy risk management systems.
“Taken in isolation, such technology investments and implementation efforts could undermine financial performance and have prompted some banks to voice concerns regarding the cost to comply with Basel II and other regulatory mandates,” Kopp said. “Conversely, greed and unscrupulous governance have occasionally taken advantage of structural weaknesses in the control system. A few embarrassing scandals have made the headlines, undermining the reputation of the FSIs [Financial Services Institutions] involved as well as public confidence in the financial system. Because some FSIs may still lack self-discipline, regulators have stepped in. Is the resulting flurry of banking regulations too burdensome, or have some institutions been out of control?”
US banks, meanwhile, are lagging behind their European counterparts. “Over the past few years, political debate among US regulatory agencies and stark opposition by local and smaller banks has kept the Basel II framework off limits except for the largest, internationally active institutions,” said Kopp. “Spicing up a protracted controversy between the mighty and the humble and the sophisticated and the primitive, US regulators are now speaking with one voice. The revised Basel Accord will apply to all banking companies in the United States.”
European banks, however, have not been dogged by political delays and are forging ahead. Basel II is effectively a part of European Union law following the approval of the Capital Requirement Directive in October 2005.
In Asia, the situation is less rosy. “For most Asian banks, adopting the Basel II framework and supporting technologies is still a challenge,” said Kopp. “While many claim that the benefits in capital and credit risk management from Basel II are uncertain, most banks are postponing investments in the new field of operational risk management and may miss the opportunity to reduce operational losses.”
In Australia, a number of banks have applied for accreditation from the Australia Prudential Regulation Authority (APRA) to pursue the advanced approach to Basel II, capping a huge effort to meet APRA’s deadline. Anecdotal evidence suggests Australian banks are well ahead of their Asian peers, but APRA would not say how banks have applied for accreditation to pursue the advanced approach.
Those banks in the US that have resisted, moreover, may be putting themselves in a difficult position with both regulators and competitors. “Some US banks, despite lagging in risk management competence, have resisted Basel II, but are now getting a wake-up call from regulators and competitors,” Kopp said. “Responsible leadership and market forces will ultimately prevail: the rewards of using advanced risk management processes and technologies will encourage banks to move away from parochial ‘lending from the gut’ approaches and free up disproportionate cushions from capital reserves.”
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15 March 2006
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