New research finds credit risk tops spending during tough economic times, as Basel II approaches and methodologies evolve.
Short-term versus long-term, the spending projections are in and risk-management technology faces a tough budget year as the difficult economic climate continues.
Deborah Williams, research director at Mass.-based Meridien Research, says that while banks are hesitant to appropriate funds for large projects, the spending on risk is still there in some areas. "2003 overall, in our opinion, is a problematic year," she says. "People are motivated to spend little bits here and there, but 2003 in general is not going to be a huge spending year."
But while spending overall is down, there is still some money being funneled into certain areas of risk-management technology and the long-term picture is not so dim. According to a recent report by Meridien Research entitled, "Risk Spending 2002: Finding Growth in a Slow Market," credit-risk and operational-risk spending are on the rise. "Our outlook for the next five years still looks pretty rosy for things like credit risk and operational risk and even for market risk to be inching along, especially in the area of ASPs," says Williams. Meridien would not disclose specific spending figures beyond 2002.
Weathering the Downturn
"Risk systems are very important, but they don't generate revenue," says Williams. "Therefore, their ability to get funded in this environment is difficult.
In other words, while the economic environment is taking a toll on spending, it is also driving spending in some areas. "Credit risk is the fastest growing area," says Williams. "Other areas like operational risk are growing fast, but they start with a pretty low spending number, so any growth looks big."
Williams says that while credit risk is a not a new area for measurement like operational risk, it is an area that has been maturing over the last few years from a methodology perspective and now the technology side is starting to catch up. And with Basel II recommendations expected to come out next year, spending on credit-risk-management technology only looks to increase even more.
Overall, Williams says the growth in spending in the credit-risk area is attributed to a combination of factors. "There's a market downturn, so people are getting hit with losses, there's BIS II, the advances in methodology and the growth of the credit-derivatives market. All of these things are adding up together, coincidentally, to create a bigger buzz than if they had occurred individually," says Williams.
More specifically, Williams says that credit-risk management has been changing as firms are looking at portfolios of credit. More quantitative approaches to credit worthiness, based upon market rates, are also being introduced as opposed to the previously relied upon balance-sheet approach. "If you're doing something that's market-based, you can look at market levels everyday, so it's much more proactive," she says. "When going to a more quantitative approach you need technology."
In addition, the global nature of banking and consolidation are driving the credit-risk-management trend.
Risk Spending Estimates for 2002
$16.217 Billion - Total spending on risk-management technology in 2002
$1.934 Billion - Total spending on credit-risk-managment technology in 2002
The Meridien estimates are based on aggregate spending in the banking, securities, and asset management and insurance industries. The total spending number includes the following areas: Enterprise-Level Risk Analytics, which covers enterprise market risk, enterprise credit risk, enterprise operational risk, asset and liability management and risk ASPs; Desk-Level Risk Management; and Infrastructure, which includes data architecture and reporting.