Spending on IT systems is still rising to meet new regulatory demands, with credit risk growing as a priority. Michael Watt reports Despite low trading volumes, regulatory upheaval and large cutbacks in personnel, expectations of continued technology spending are only slightly lower than last year. Almost 60% of respondents to the Risk technology survey plan to increase investment in IT systems in the next 12 months – a few percentage points fewer than the figure recorded in the December 2011 survey (see the full results via the link at the end of this article). This slight drop notwithstanding, the proportion of respondents anticipating a significant investment has actually increased. Of those who will be spending more than their 2012 figure, 44% put the increase at 11–20%, while 14.3% said they’d be spending anywhere between 21% and 50% more. The proportion of respondents expecting an increase of up to 10% was 37.7% – down on last year’s 43.5%. Market risk will continue to be the biggest recipient of this extra cash, with 18.9% tagging it as their top priority, compared with 21.4% last year. Basel 2.5 is now a year old among European Union banks, and has been implemented at the two major Swiss banks, UBS and Credit Suisse, since early 2011. US banks might have looked on with glee as their counterparts over the water struggled with the new measure during this period, but that will not last long – Basel 2.5 is still expected to come into force in the US on January 1 next year, although Basel III implementation has been postponed. The package of new trading book charges complements the existing value-at-risk rule. Banks must now calculate a stressed VAR charge, which is taken by applying a VAR model to a one-year historical period of extreme financial stress. Added to this is the incremental risk charge, which is to be applied to banks that have regulatory approval to model specific risks, and a comprehensive risk measure that captures risk in correlation trading books at the most sophisticated banks. The impact of Basel 2.5 on banks’ risk-weighted assets (RWAs) has varied widely from firm to firm, but the package of rules is slated to be replaced following a review by the Basel Committee on Banking Supervision (Risk April 2012, pages 35–39). Credit risk has grown most as a spending priority, moving from fifth place last year to third this year with 14.5% – that may reflect the incoming credit valuation adjustment charge, which forces banks to hold capital against derivatives counterparty risk. Calculating the charge requires multiple portfolio simulations to be run, which is a huge drain on computing power and has spurred software vendors, academics and practitioners to look for ways to simplify the process (Risk August 2012, page 52). Spending on liquidity risk is still a low priority, with only 4.4% of respondents looking to invest most in this area. This is despite a requirement for banks subject to Basel III to begin reporting liquidity coverage ratio (LCR) data from January, ahead of full implementation in 2015. The LCR is designed to ensure banks hold enough liquid assets to match expected outflows during a 30-day period of stress. It has been the subject of intense wrangling, and the Basel Committee is hoping to agree a final round of changes by the end of this year (see pages 36–38). For 32.4% of respondents, a general need to update ageing systems remains the main driver for technology spending. Basel III was ranked second, chosen by 21.4% of respondents. The number of people seeing the Dodd-Frank Act as the priority has more than doubled, moving up from 10.2% last year to 21.4% this year. The questionnaire was completed by 1,012 respondents, with around 50% of those working in the banking industry. The balance is made up of respondents in asset management, insurance and consulting. Expense makes sense...
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