New levels of regulation and competition are
influencing risk management expenditures, intensifying the impact of
superior risk management practices on financial institutions’ success.
Since the turn of the decade, risk management and
compliance functions within financial firms have been subjected to intense
regulatory scrutiny. The "big four" regulatory themes include:
anti-money laundering, accounting standardization (IFRS, FAS), financial
reporting (SOX, J-SOX), and capital adequacy (Basel II, or Capital
Adequacy Directive). Celent predicts global risk and compliance spending
will cross the US$14 billion mark in 2008, up from US$13.6 billion in
2007. In a new report, Managing Risk and Compliance: Responding to New
Realities, Celent details the capabilities institutions should develop
if they are to draw value from their risk and compliance initiatives.
As firms go past the regulatory gates, pertinent
post-legislation questions have yet to be answered. The current turmoil
associated with subprime mortgages and structured credit market (CDOs and
other hybrids) highlights the potentially severe impact of actively
pursuing distribution (and redistribution) of risks. These new realities
demand a level of transparency, structural integrity, and operational
controls that, at the moment, leave a lot to be desired.
Current developments should intensify the need for
better coordination between the various parts of the credit management
value chain, as well as addressing potential conflicts of interest and
valuation and interconnected risk management challenges associated with
the velocity of market movements. Regulatory and stakeholder scrutiny will
increase, and linkages between origination, credit portfolio management,
credit control, and administration need to be actively managed.
Other factors (such as the need to balance multiple
stakeholder demands for the efficient use of capital, and continuing
trends towards an "originate and distribute" paradigm of
handling asset portfolios) are both drivers for and a consequence of the
move towards new competitive realities of advanced risk management
practices.
"Firms undertaking one or more of these
regulatory mandates to develop infrastructural building blocks and achieve
basic regulatory compliance need to evaluate how risk management and
compliance initiatives can add value to their company, as well as what
these issues mean from a competitive perspective,” says Cubillas
Ding, Celent senior analyst and author of the report. “The coming
years will be characterized by game-changing dynamics as a result of
improved risk management capabilities."
The 32-page report contains 10 figures and three
tables. A table of contents is
available online.
