Banks spend billions on risk management IT, but is IT working?

I was chairing a conference about risk and regulation today, and opened with the view the it is the culture of banking that needs to change.  You can force the change through regulation, but if banks really want to be able to prosper post this crisis, then it needs cultural reform.  And it’s not about the credit crisis or the sovereign debt crisis, but about the crisis of confidence in the whole darn banking system post LIBOR, PPI and mortgage mis-selling, money laundering and pulling the rug on lending.

At the core of all of this however is the balance between risk and profit.   That profit focus of selling as much product as possible – PPI, mortgages, loans, credit – is what created this debt-fuelled crisis and it was the over zealous acceptance of greed over risk that reinforced it.  This greed above risk attitude is exemplified by people like Kweku Adoboli and Jerome Kerviel but also, on a lesser level, by the remortgaged losers who took their hard earned capital from their main asset – their home – in order to reinvest in secondary assets – another home overseas.

I have friends in Ireland for example, who bought holiday homes in Spain by remortgaging.  Now their main house is worth less than their mortgage and their second home is worthless.

It’s all about the balance between greed and risk, risk and profit.

So it’s interesting to hear that the balance has firmly shifted towards risk management as the research firm Chartis presented at the conference.

They estimate that banks will spend around $21 billion on risk management systems this eyar and $23 billion next.

Almost half of this spend is going into credit risk ($9 billion), around $4.5 billion is going into financial crime risk, $2 billion into market risk and $1.5 billion for operational risk, whilst a billion goes towards liquidity risk.

A further $5 billion will be spent on integration projects.

That’s some budget.

About half of this (51%) is internal cost, whilst 24% is software, 19% on services and a mere 6% on hardware.

These numbers are pretty mind numbing, but then so is losing a trillion dollars or two, as illustrated by the total exposures and losses throughout this crisis.

So it intrigues me that in our annual survey of banks, most are still saying they have no real-time capability to see their intraday positions, exposures and counterparty risks.

No wonder they are spending billions to fix this gap and for the tech firms it must be like manna from heaven to find another area other than regulation where you can tap into the bank CEO’s wallet.

Oh, hold on, it is regulation that is driving this isn’t it?

EMIR, Dodd-Frank, Basel III etc.

But the biggest driver should not be the regulation but the bank’s desire to avoid exposing itself to further risks of the most fatal kind.

Reputational risk.

After all, it is the risk of further damaging client and governmental confidence that will see banks becoming pawns of the economic chessmasters in the future and, for many, that’s already happening.

So maybe they should have shut down the risks before they bolted out the door.

Meantime, with $20 billion a year being spent on risk management, let’s hope that the future risks have been firmly locked behind the door for the future.

 

Comments

[Rowan Bosworth-Davies]

Chris makes a good point, but the technology spend will only return value if the bank employs people who know how to interpret the findings and the alerts the risk management software identifies. This is particularly true in the field of anti-money laundering where too little time and money has been spent ensuring the employment of staff who truly understood the real nature of the suspicious transaction disclosure regime, and who were able to interrogate the technology sensibly to get the best value for money. Shah -v- HSBC should have taught all of us the truth of that message!

[MarkMixter]

Chartis: $5 billion will be spent on integration projects by Banks this year and next. #Saas #finserv

[Bill Jones]

"At the core of all of this however is the balance between risk and profit. "

Its a matrix of risk and opportunity and, profit and loss. Profits or losses can occur under either.

Different industries and cultures define risk in different ways and this creates challenges.

The irony is that the subculture which attempts to minimise risk in the banking industry is the very subculture which increases risks for people and encourages risky behaviour in people. That subculture is the one that politicians occupy.