We forever talk about the value of the enterprise view - of fraud, risk, or customers - and the necessary outlays for enabling technology. But what about federal regulators; is Uncle Sam due for some expensive silo busting as well?
If outspoken bank analyst Meredith Whitney is right, banks aren't alone in their need for innovation that helps navigate the new financial services landscape while evolving beyond legacy culture.
In a recent panel discussion at the Milken Institute, Whitney took aim at bank regulators, questioning their ability to adequately govern the industry in a new fashion, given their "super-siloed" nature and "pencil ledger" accounting systems. "One division knows what they're doing, and they're speaking Mandarin; and another division knows what they're doing and they're all speaking Cantonese," Whitney said, later adding "If you're leading regulatory reform you have to have the technology as well, and [regulators] have not embraced technology."
Political consensus has embraced the idea that the entire financial services industry - not just banks - ought to be regulated by a "super-regulator" tasked with monitoring for systemic risks. Where this thankless job will land; who will effectively become the Chief Risk Officer for the entire system, is still unwritten. But the technology investment required by banks and regulators to make this happen will be massive.
It's not as if Federal regulators don't spend money on risk management and other sophisticated applications. But a systemic risk regulator will need access to transaction-level data, something hedge funds and other asset managers are loathe to give up. Summary forms, as in call reports or 10Ks, aren't enough. "There is a big information component that will be critical for the success of the systemic regulator," says Richard Spillenkothen, director at Deloitte & Touche and the Federal Reserve's lead banking regulator for 15 years.
All of this data will require real-time analysis, creating demand for complex event processing and technology that reduces latency. For sophisticated financials, feeding this data to the government won't be a major challenge, at least from a technology perspective. For smaller institutions, impending regulatory demands will provide a mandated motivation to invest in the kind of enterprise risk management and compliance systems they've refrained from buying.
Systemic risk monitoring is functional elsewhere. In Germany and Israel, for instance, regulators have real-time information about banks holdings. "From that standpoint, the U.S. is a little outdated," says Andrew Liegel, senior product manager at FRSGlobal.
But implementing a new regulatory structure on the U.S. financial system is a bit like turning a supertanker; it's going to take years. But as CIOs, CEOs and boards spend time contemplating business strategy and associated technology investments on the other side of the recession, expect Congress to ensure that investing in technology to enable compliance will rise to the top of the list.