Recently, much has been written about the fate of financial services technology spending given the recent financial crisis. The Wall Street Journal’s Business Technology blog, for instance, points out here that Lehman spent $309 million on technology and communications in the quarter ending August 31. It’s hard to know exactly how much of that spending would be cut under a dramatically reduced operation under Barclays, but clearly, at Lehman and elsewhere tech spending’s going to take a hit in the financial services sector.
However, there is one technology area that will certainly get increased attention and that is in risk management. It’s very likely that 2009 regulation will include greater checks on leverage and an expansion of banking-like regulation to other businesses with banking-like activities. And regulators are already focused on improving the risk management functions of financial services institutions. For instance, WaMu announced on Sept 8th that they had signed an MOU with the Office of Thrift Supervision concerning different areas of the business, including the risk and compliance functions.
Risk management technology, the systems that provide visibility into the state of risk in the business, is a critical component or early warning system for risk managers trying to run the business. Of course, knowing about the risks is not always sufficient. Just ask David Andrukonis of Freddie Mac who’s CEO apparently ignored the early warning signs of excess risk exposure, according to the New York Times. Nevertheless, having the risk managment infrastructure in place at least allows management to make informed decisions about what risks to take or not.
And there’s another driver here for risk management technology. Over time, shareholders, not just regulators, will want to have better visiblity into the risk exposures in a company. The Fed demonstrated that they are willing to let large entities fail (well, sort of), and as such it will be up to the market to assess risk in the business. Management will be encouraged to provide transparency as to the state of risk in the business through a lower cost of capital, the benefit for which would dwarf the cost of any risk management technology. Which is why I think spending on risk management technology will not drop as much as the overall market for financial services IT spending.