Banks expected to increase risk technology budgets after March crisis

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Adobe Stock, Bloomberg News

Regional banks will likely upgrade their risk management technology as the recent spate of runs and woes in the industry raise concerns about all elements of their risk positions, experts say.

Researchers and consultants said banks across the country are planning to ramp up investments in technology to assess risk across their institutions following the collapse of Silicon Valley Bank and ensuing panic. Financial institutions want easy-to-use technology that can analyze large amounts of data in real time, run more types of stress test scenarios and run stress tests with higher frequency. 

As banks seek to manage end-to-end risk, including in the areas of liquidity, operations and cybersecurity, they'll allocate more money to vendors and solutions for data analytics, financial crime surveillance, regulatory compliance and audit. While many experts expect some regulatory changes, it's too early to predict what those will entail or who they will affect, analysts said.

Most regional and super regional banks had previously sought to spend as little as possible on risk management technology to meet minimum regulatory and compliance requirements, said Ronak Doshi, a partner focused on digital transformation and banking at The Everest Group, a research firm. However, in the last six weeks, banks have felt pressure from their boards, employees and other stakeholders to prioritize risk assessment.

"Banks are suddenly saying, 'Risk management is a very key component of who we are as a bank,'" Doshi said. "'It's not just the cost of doing business. It is the business.' We are seeing an increase in activity in terms of the risk technology spend that is happening."

Doshi projects that banks will increase their annual spends on risk technology by 8% to 12% in the next 12 months. At some regional banks, that could mean an increase of several million dollars. 

Key factors banks will look at while choosing vendors and solutions include ease of use and integration, sophistication of data analytics and artificial intelligence and machine learning capabilities, Doshi said. He added that for services like stress tests, banks are more interested in a wide array of models and scenarios.

Jason Osborne, who leads the North American Banking and Capital Markets segment at consulting firm Genpact, said he's seen a massive increase in the prioritization of risk and risk reporting. He added chief risk officers are prioritizing not only liquidity management, but also speed and simplicity in reporting processes to mitigate the effects of the runs. 

Banks have been more interested in investing in methods for real-time monitoring of data and analytics, sophisticated artificial intelligence and machine learning to analyze large amounts of data and cloud options for increased data access, Osborne said. Many banks' data is tied up in legacy mainframe systems, which often isn't accessible in real time.

Osborne added that the focus on generating a full picture of potential risks has raised more conversations about developing technologies that could monitor alternative external data, like WhatsApp or Twitter feeds, and incorporate that into risk management. Banks can—and currently do—monitor social media feeds for consumer sentiment analysis, but observing for risk factors would be a newer development, Osborne said.

Stessa Cohen, a banking technology analyst, said different lines of business and divisions of banks are often siloed, which can affect risk management. She said risk analysis must be cohesive across different functions of an institution, and include steady internal and external communication. For example, if a relationship manager hears that a client is concerned about the bank's liquidity, that interaction should be conveyed across the bank.

"Banks need to take a look at their risk management solutions and say, 'Do we have a different solution for each line of business? How can we enable them to talk to each other?'" Cohen said. "[Banks] need to look at this holistically, across lines of business and lines of technology. Easy to say, harder to do."

The increase in risk management technology investments means banks will likely cut back on discretionary spending for innovative and disruptive technologies, like metaverse, web3 and blockchain, Doshi and Osborne said. 

"It is a constant battle with banks. A bank has, from a technology prioritization roadmap, 'build the bank' and 'run the bank,'" Osborne said. "'Build the bank' is going to be all of the new technology features. The 'run the bank' is going to be tied to legal, regulatory, risk and reporting. What you will see happen, based on the conversations that we've been having, is that 'run the bank' will eat up a lot more of the discretionary spend for 'build the bank.'"

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