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Managing Risk and Compliance: Responding to New Realities

New levels of regulation and competition are influencing risk management expenditures, intensifying the impact of superior risk management practices on financial institutions’ success, according to a new report, "Managing Risk and Compliance: Responding to New Realities" from Celent, a Boston-based financial research and consulting firm.

Key findings of the report include:

• For banking institutions, an average of 11.3% of IT spending is related to regulatory projects–and the figure is higher in regions such as the US and Europe. Celent predicts that global risk and compliance spending will cross the US$14 billion mark in 2008, up from US$13.6 billion in 2007.

• The "big four" regulatory themes which have driven the most significant expenditures have fallen into the areas of anti-money laundering, accounting standardization (IFRS, FAS), financial reporting (SOX, J-SOX), and capital adequacy (Basel II or Capital Adequacy Directive).

• 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.

• 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.