The world’s largest banks are facing a collective $50 billion bill to upgrade their information technology. That’s part of the story laid out in an article by Dan Davies:

Despite their claims to have state-of-the-art computer systems, it turns out that household names like RBS and Deutsche Bank are incapable of reliably producing information mandated by regulators because of “Excel spreadsheets updated by hand, databases which systematically got the sign wrong on long and short positions, all of that sort of thing.”

But why are banks that rely on technology for their basic operations — Treasury bills don’t exactly move from one bank to another in a courier’s messenger bag—incapable of summing up their positions accurately? They certainly have the ability to hire smart IT people, and they have lots of them.

The answer has to do with the nature of modern banking. Traders (to take one example) are in the business of making profits on the basis of superior information. Because informational advantages can be short-lived, they will invest heavily in technology that enables them to parse information faster (such as algorithmic mining of Twitter feeds) and place trades faster (shortening the links between New York and Chicago). In that business, better technology translates into higher profits and, more importantly, higher bonuses.

When it comes to risk management, however, the incentives are flipped.

Risk management systems don’t generate profits; they are part of the back office that banks wish they didn’t have to have.

More specifically, traders have no interest in effective risk management systems. Because they have to pay a cost of capital based on the risks they take, they want the riskiness of their positions to be systematically underestimated. And, in general, it’s the traders who run the big investment and universal banks, not the risk managers.

Even trading systems do go haywire sometimes. Remember Knight Capital? As I wrote then,

The incentive is always to get a trading edge and roll it out quickly to beat the competition and maximize profits. The same short-term, take-the-upside-and-offload-the-downside attitude that helped make the financial crisis possible means that trading firms will systematically underinvest in software quality.

For the people who call the shots, new software algorithms offer a high probability of higher profits (and bonuses) and a low probability of something really bad happening and someone in IT losing her job. It’s not a hard decision to make.

So it’s a good thing that, as Davies writes, regulators are cracking down and demanding more attention to those crucial risk management and reporting systems. Whether they will succeed or not is uncertain: that $50 billion could just end up in the pockets of IT consulting firms that do shoddy work (remember healthcare.gov)? At the end of the day, it’s hard to mandate software quality, especially at banks that prefer to look the other way.