To ensure that the government is aware "instantaneously" of problems in the financial markets, the US Treasury Department wants the financial services industry to supply regulators with real-time data on what's happening with banks, insurance companies and similar institutions. Such a change would require both new technologies and remarkable spending.
The Treasury Department's "Blueprint for a Modernized Financial Regulatory Structure," released Monday, seeks to use IT to help prevent future problems similar to those now affecting the markets. It wants to know about changes going on inside banks, insurance companies and other regulated institutions as they happen -- the IT equivalent of a "heart monitor" attached to financial services firms.
The government does not currently have a dashboard-like program that could supply that sort of insight into the health of this industry (and, possibly, spur action before markets melt down). This inability to really diagnose the extent of the financial problems is because of a paradox created by IT.
On the one hand, IT gets credit in the Treasury Department report for enabling financial services firms to offer "innovative, risk-diversifying, and often sophisticated financial products and trading strategies." But at the same time, "financial institutions have generally become more opaque and more difficult to understand."
But don't expect a fast technology upgrade based on those findings. In his remarks Tuesday, Treasury Secretary Henry Paulson, said the report's recommendations won't fix current problems. And he seemed to take pains to point out that this was the start of a long-term discussion that "will not be resolved this month or even this year."
But industry analysts who cover the financial services industry said these firms are likely looking at some big changes. One of the reasons why the financial markets have been in peril is because of a disconnect between originators -- mortgage lenders in this case -- and investors.
"What technology fails to do is to integrate the credit and trading decisions," said Guillermo Kopp, an analyst at The Tower Group. Whether companies fix that disconnect as a result of business decisions or because of the threat of regulation, integration will nonetheless benefit big services companies that provide integrated risk management systems.
Overall, Kopp believes IT spending worldwide on risk management will increase from about US$24 billion this year to $30 billion annually over the next several years. Many of the larger banks here in the US and Europe already have these integrated systems, but the message from the US is that "this is not a nice [thing] to have, it's a must-have."
If the Treasury Department's recommendations become a framework for regulation, "the impact would be huge because they [financial services firms] don't have those dashboards internally now," said Jeanne Capachin, an analyst at Financial Insights, an IDC company.
The insurance industry, for instance, would have to develop capability to sense events, analyze them, and respond and report to regulators in a timely fashion, "and right now I don't see the insurance industry as being able to do that," said Barry Rabkin, also an analyst at Financial Insights.