Sibos 2012: Banks’ fragmented IT prompts financial system risks

Banks burdened with the difficulty of data aggregation across global business units will only succeed if they develop standardised technologies to help adapt with ever-changing regulations.

  • 30 Oct 2012
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Technology adopted by financial institutions with businesses spread across multiple systems and geographies could become a problem if not tackled early, leading to overly fragmented systems.

The regulatory environment is changing very quickly as a result of the 2008 global financial crisis (GFC), which came about from the failure of banks to manage counterparty risks or to anticipate any of these risks.

The technology that banks currently have in place must be completely redesigned to meet the existing rules of Basel II and the new rulings of Basel III, says speakers at a Sibos panel titled ‘Can technology carry regulation burden?’ held in Osaka on October 29.

“Banks now are still struggling to implement Basel II. The real intent was to provide minimum standards to make risk management work well,” said Mark Lawrence, managing director of Mark Lawrence Group at the panel. “What this requires is for risk and technology people to work together and develop something coherent. It’s a risk management project with a large technology component.”

Because of the fragmented nature of information technology (IT) infrastructure in many financial institutions, banks took more than a week to pull up their exposures to Lehman Brothers during the GFC, adds Lawrence.

For example, merger and acquisitions (M&A) activities have increased the number of inconsistencies in the organisation, making aggregation of risk exposures difficult and impossible.

“Problematic IT systems underneath comes from the increase of legacy systems when you bring more banks together,” said Lee Fulmer, managing director for CTO cash management at J.P. Morgan at the panel. “You need to pick the one system you want to build on and invest your millions in that one system.”

In June 2012, the Basel committee published a paper entitled ‘Principles for effective risk data aggregation and risk reporting’ for comment by the end of last month. This paper consists of 14 principles in total, including four principles relating specifically to the accuracy and integrity, completeness, timeliness and adaptability of banks’ risk data aggregation capabilities.

This Basel paper also makes explicit the power of supervisors to curtail banks’ business activities and growth initiatives if their risk data aggregation capabilities are not sufficiently robust.

“Banks have to clean up their systems ‘spaghetti’,” said Lawrence.

In addition to implementing effective technology systems, financial institutions need to put themselves into clients’ shoes, and then take all the relevant information in the value chain and present that to regulators.

“You have subsets in each system and the problem is that when you move from systems to systems, you lose a little bit of context,” said J.P. Morgan’s Fulmer. “If you can orchestrate the data flow and what the systems holds, then you can see the source.”

Some examples of technology platforms that financial institutions should adopt include ‘cloud computing’. It is a platform that is able to offer “low cost and high-performance”, says David Saul, senior vice president and chief scientist at State Street in the panel.

  • 30 Oct 2012

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1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

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1 JPMorgan 13,485.80 35 12.64%
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1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
3 HSBC 11,482.63 54 7.98%
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5 BNP Paribas 7,314.81 22 5.08%

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1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
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4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

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1 AXIS Bank 6,343.17 130 18.89%
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5 ICICI Bank 1,992.51 54 5.93%