The rapid evolution of risk management in emerging economies has seen some banks in emerging economies overtake their Western peers in terms of risk sophistication, according to experts.

With financial institutions in Western Europe struggling to integrate disparate legacy risk management systems, banks in emerging countries implementing technology for the first time are stealing a march on their peers by purchasing more advanced and integrated risk technology, allowing better decision-making and optimal use of capital.

“In many instances financial institutions in the newer economies are able to skip a generation of risk management software, and move straight to a full enterprise risk management solution, integrating the balance sheet assets and liabilities and covering the full range of markets and financial instruments and scenarios, within a single, unified framework,” said Eric Takigawa, a managing director at risk technology firm Algorithmics. “A single, integrated solution will lower the cost of ownership, helping to provide a competitive advantage.”

Algorithmics has signed deals with banks in Turkey, China, the Middle East and Russia and believes banks in emerging economies are going straight to ERM implementation and the value it can add. “Innovation in financial markets and technology has resulted in real value creation,” said Takigawa. “It helps enable market players to better identify and use information asymmetries from a risk-centric perspective; to make use of the interrelationship between market risk and credit risk and their effects on all important liquidity before the actual impact of widening spreads; and set in place operational risk management systems to become more efficient and hence more competitive. As these examples demonstrate, we are seeing an increasing number of clients moving straight to a complete, enterprise-wide risk management system to help them achieve dynamic growth and competitive advantage. We believe this is a mega-trend that will accelerate in the future.”

Indeed, UK research specialist Chartis Research recently identified a number of ‘demand hotspots’ for operational risk technology, which included many emerging economies. “Our market research has revealed that a third of new software expenditure in Europe, and a quarter of the expenditure in US, is ‘replacement’ spend,” the analysis read. “Many of the ‘tier one’ financial institutions and some of the ‘tier twos’ are now in the market for second generation, or even third generation, ORM systems. Some of the replacement expenditure is due to natural product life cycle developments in the market (eg early products being too rigid to cope with the ongoing evolving needs of ORM).”

The research also found that emerging markets are becoming an increasingly important driver of ORM expenditure. Southern Europe, the Middle East, Africa, Latin America and Asia are the fastest growing areas for ORM spending, Chartis said. Additionally, in more mature markets, while many larger organisations are replacing existing technology, many ‘tier three’ organisations are implementing formal ORM processes and systems for the first time.