The increasing number of regulations and the growing sophistication of new financial
products and instruments, such as credit derivatives, have led to financial institutions
sleepwalking into complex environments of silo-based processes and risk systems. This
fragmented approach to compliance and risk management has resulted in many firms
looking for the ‘Holy Grail’, that is integrated enterprise risk management. Furthermore, the
recent credit crisis, coupled with high profile operational and business losses have pushed
governance, risk and compliance (GRC) further up the agenda for many boards. The
traditional silo-based ‘box-ticking’ approach to risk management is no longer valid. Chartis
predicts that an enhanced form of Basel II, possibly named ‘Basel III’, will be introduced
between 2012 and 2016, requiring national regulators to address many of the limitations
and gaps in the current Basel II standards. For example, banks will be required to set aside
more capital against complex structured credit derivative products and off-balance sheet
vehicles. This will result in a new wave of expenditure in risk technology between 2012
and 2018.
Forward looking banks in EU, US and Asia-Pacific have finished implementing the core of
their Basel II systems and processes, and are now shifting their attention to opportunities
for reducing cost and complexity. In addition, work continues on some of the Pillar II
functionalities, such as stress testing and model validation, particularly in the area of credit
derivatives and hedge-fund portfolios. At the same time, financial institutions are looking
to gain additional value from their investment in Basel II, through better usage of data
management, risk-based performance and integrated compliance.
Basel II is still fuelling demand for credit risk management systems in emerging regions,
such as Middle-East, Africa, Eastern Europe, Asia-Pacific and Latin America. Financial
institutions in these regions can learn some important lessons from European banks and
the early movers in other parts of the world. Lessons learnt include:
• Avoid having a piecemeal approach to regulatory reporting
• Look beyond Basel II to define data requirements
• Define the final target architecture based on an integrated set of business
requirements
• Define key metrics upfront
• Consider the most complex asset classes in detail
• Consider a step-by-step approach, giving due emphasis to data integration, stress
testing and model validation steps
• Choose vendors with deep domain knowledge and experience
Chartis forecasts the worldwide credit risk management systems market to grow to $8.63bn
by 2012, at a steady 7% compound annual growth rate. As previously predicted, credit risk
systems expenditure is coming in a series of overlapping waves
On the supply side of the market, there are a handful of vendors who are leading the way.
These include Algorithmics, Fermat, SAS and SunGard. The common factor amongst the
leaders is the ability to offer multiple solutions across the ERM (enterprise risk management)
spectrum and coverage across multiple assets/products. These integrated offerings
provide significant value for financial institutions looking for a cost-effective ‘one-stopshop”
for a range of risk and compliance solutions. The market is also segmented along
specific verticals and geographies.
