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Understanding technology risk

S&P might be taking too narrow a view when it identifies tech glitches as a credit risk for exchanges.

Is technology risk now a threat to bondholders? Standard & Poor’s seems to think so, judging by a report released in September. In the report, the rating agency says it will be considering downgrading stock exchanges in coming years because of the operational risk borne out of technical glitches. Glitches, it argues, seem to be on the increase.

If rating agencies are applying the logic that exchanges are riskier because of tech outages, the question is, will the firm also be applying similar rules to other companies? Outside of exchanges, in September a computer glitch at the Federal Reserve Bank of New York caused losses for Goldman Sachs in a treasuries auction. Online banks are also suffering from outages. Beyond finance, Amazon’s web server ran into problems in August, causing several websites to suffer outages and slowdowns – the third outage in two years – and in September, Google ran into problems with Gmail.

In addition, firms that operate in the cloud have suffered large data losses because of outages. Evernote lost the data of 6,000 customers in 2010.

Insurance company Marsh put out a report last month on how tech outages were adversely affecting company supply chains more than all other supply-chain disruptions, including severe weather events, transportation disruptions and product contamination.

The more technology is used in every industry, naturally the more outages will occur, but does this really affect bondholders? Is a firm’s creditworthiness linked to IT operations? It’s an interesting question. In the case of the exchanges, Nasdaq argues that its business is so diversified that tech glitches in the exchange business would have little impact on the financials of the firm.

Could tech firms say the same? Probably not. And online banking and cloud data storage for banks – are those risks that could have a negative and lasting impact on financials for banks?

Although S&P definitely raises a good point and one that will need to be addressed over the coming years, it seems a little trigger-happy for the rating agency to announce possible downgrades because of tech outages without having really thought through the factors by which it will judge operational risk as having an impact on bondholders.

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