Over the past 12 months, spending on technology by the top 12 corporate and investment banks has increased the most, at 5.4%, and now accounts for approximately 40% of all functional area spending and 21% of spending overall, according to Coalition Greenwich.
“Corporate and investment banks are balancing the need to grow their business with the need to invest in systems to create efficiencies through automation that enhance the client experience and accommodate new regulations,” said Stephen Bruel, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Corporate and Investment Banking: Spending Priorities.
During the same time period, spending on operations was up a much more modest 0.9%.
This reflects the idea that certain technology investments are intended to help create automation and scale and decrease manual intervention, commented Bruel.
Coalition Greenwich research indicates that the top 12 corporate and investment banks, measured by revenue, spent $139 billion in 2022 to run the business.
The revenues for the top 12 corporate and investment banks have grown at an average compound annual growth rate of 5.2% for the past four years.
Revenues peaked in 2021 helped by government stimulus and the pandemic recovery but slowed in subsequent years as inflation and interest rates rose.
According to Bruel, an ambitious slate of regulatory proposals and rule implementations has made regulatory compliance and risk control increasingly important cost centers for investment and corporate banks.
Not only do firms need to spend on the expertise to manage new regulations, but they must also invest in the systems required to ensure compliance and effective risk management, according to the report.
For example, according to the report, Uncleared Margin Rules necessitated bilateral initial margin moves when it had previously been one way; CSDR forced efforts to reduce settlement fails in Europe; and T+1 will compress settlement timelines for U.S. and Canadian equities in May of 2024, which will affect each participant in the process and require more automation.
“Investing in obligatory projects like compliance may not always generate excitement, but banks are required and increasingly incented—through the reputational risk of non-compliance—to keep these initiatives front and center,” said Bruel.
He added that obligatory functions such as risk management, compliance, operations, and other administrative activities contribute significant, hard-to-reduce costs.
And given this period of new regulatory proposals and rule implementations, spending on compliance can require deprioritizing new product development or render certain products less financially enticing, he said.
Bruel stressed that “innovation can’t stop”.
The last few years have also seen disruptive technologies, including distributed ledger technology, artificial intelligence/machine learning (AI/ML), and cloud computing enter the consciousness of capital markets, forcing banks to have a strategy for these technologies or risk falling behind, he said.
How firms react to these and similar changes plays a big role in determining their ability to grow, he added.
“Investment priorities and budgets reveal that technology spending is increasingly embedded into business growth plans, ensuring that client experience, regulatory compliance, operational efficiency, and profits are all addressed,” he concluded.
