Sandy and 9/11 taught us some harsh lessons about how much of the US financial backbone is located in a narrow swath of real estate. It is true that more people are working remotely and that the Internet has made remote processing of financial transactions a reality – but that doesn’t mean that we still don’t have dangerous levels of concentration in our urban centers.
Big banks have always been in big cities, that’s nothing new. It’s the growing interdependence of our financial system and the geographic concentration that is cause for concern.
Banks, securities companies and other financial institutions may suffer if a firm’s processing center is damaged by natural or manmade disaster, but if a crucial piece of the financial infrastructure is impacted, it can send waves rippling throughout the financial system.
While concentration risk is well understood by the financial industry, and lenders have long understood that it is critical to diversify risk geographically—this is something new.
Today’s financial institutions live and die by technology. Mobile banking, online trading, electronic clearing platforms—all these run through communications networks with hubs needed in urban centers where the key financial employees are located.
While most risk management teams have their hands full managing their own exposure to concentration risk—it is the vulnerability of communication vendors, data warehouses and server farms, that have become the backbone of our financial system, that should concern us all.