The Independent Commission on Banking (ICB) has recommended that banks be made to ‘ring-fence’ retail operations from their investment arms in one of the biggest banking shake-ups in decades. Ring-fencing will ensure that banks’ customers’ funds are safe, even if the riskier investment arms fail.
The retail and investment arms of banks, to all intents and purposes, will need to be fully separated in case of a failure. Although the deadline for the reforms, expected to be 2019, may seem like a long way off, IT departments will have their work cut out to meet the deadline.
How will Banks Create the Ring-fence
It will take time for banks to adapt business processes, which are supported by a diverse range of technology, data, applications, infrastructure and networks that are often in heterogeneous environments.
A lot of the systems in UK banks were built decades ago and newer systems have been bolted on. Modern technology has been integrated with legacy systems and this has added layers of complexity.
Whilst untangling unwieldy computer systems may be daunting, complexity should not be used as a mitigating factor to avoid the systems change that is long overdue, for both business and regulatory reasons.
Will A Ring-Fence Help?
There has been criticism that the ICB’s report only advises on dealing with failure and not prevention of failure. Intellect for example has been very vocal in its belief that the report “completely ignores the common sense of using formal data analysis in preventing a crash”.
It is certainly true that ring-fencing is intended to be a last line of defence only - it will not ensure the stability of the UK’s economy or prevent another financial crisis. Prevention will come from banks having a better view of their exposure to risk.
Banks could actually take the opportunity to augment their siloed IT systems and reporting processes, which currently make it hard to gauge the health of the overall organisation, with a centralised accounting hub. Much of the problem during the financial crisis was the tangle of unwieldy computer systems in banks, which made it hard to extract the right data for analysis or compare findings of accounting and finance with those produced by risk managers.
If banks adopt an accounting hub, all transactions would be processed in one place, according to standardised accounting rules. This would make sure that the resulting data is of the quality required for purely accounting purposes, as well as allowing the same data to be used by all reporting units in the company with high accuracy.
Ensuring that all reporting is pulled from the central accounting hub will allow banks to create comprehensive reports across all business units and have clear sight of the organisation’s risk and financial landscape as a whole.
Although the ICB did not focus in their report on the quality of the data that banks manage by, making the banks untangle complicated computer systems through an enforced ring-fence may actually encourage them to take the chance to improve their IT and therefore their ultimate efficiency.