Global risk and compliance spending will cross the US$14 billion

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.

Institutions should align the areas of risk management, capital planning, and performance measurement to ensure that capital structure and performance measures support strategy. Having transparency and increased granularity via more sophisticated valuation of risk enables a more precise capital / balance sheet optimization and accurate performance figures to support the funding of operational and strategic investments.

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.

Celent anticipates there will eventually be a more distinct separation between winners and losers. Winners will be characterized by their ability to profitably differentiate risks more effectively and to avoid unprofitable downsides. For laggards, ineffective risk management and inefficient compliance operations will result in operating overheads weighing on their cost/income ratios and profitability.

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