In its April interim report, the Independent Commission on Banking put forward proposals that retail banks be ring fenced from their investment banking arms. The aim of such an approach would be to protect consumers from high risk investments and prevent a repeat of the global financial crisis.
Since the report was issued, MPs and industry alike have called for further details on what ring-fencing might look like and warned that such measures might impact the ability of UK banks to compete effectively in a global market. The lack of further details at this stage makes it difficult to determine the implications of such regulation at a banking systems and technical level.
However, it is clear that constructing a ring-fence, whatever form it takes, will take a substantial amount of time, partly because of the complexity and diversity of IT systems and data sources within banks.
To achieve a ring fenced structure, banks must to all intents and purposes, be functionally split, as if they were being prepared for full structural separation. Such large scale change could take anything between three and five years.
Current banking systems are often made up of disparate technologies and functionality that can differ by department, geography and product line.
This meant that, in a number of cases, the data that banks were able to gain access to in the run up to the financial crisis was not granular, accurate or comprehensive enough to paint an truly reflective picture of the financial risk of the organisation and consequently the wider global financial system.
As a result, the banks themselves, as well as the regulators, were unable to step in and avert the recent crisis in a timely manner.
A retail ring-fence should be the last line of defence within the financial system. If the data that banks are using as the basis for extracting insights is not reliable in itself, the regulatory authorities cannot identify and mitigate the build up of risk on an institutional and systemic level.
This will mean that the ring-fence becomes less of a safeguard and more a front line of defence against the effects of financial instability, not the role it was designed to achieve. There is clearly a significant need for banks to increase the standard of their reporting, regulatory, liquidity and risk data and for regulators to develop frameworks within which this can be captured and analysed.
One potential way to improve the quality of accounting data and the subsequent reporting is the introduction of an accounting hub, which centralises existing accounting capabilities, and processes all transactions in one place, according to standardised accounting rules. Implementing a centralised accounting hub for the bank would provide the much needed transparency and offers a holistic view of the organisation’s risk and financial landscape as a whole.
As pressure on banks to invest in their financial control systems continues to grow, banks will be required to untangle complex, legacy core banking systems developed over many years which are opaque and inflexible.
Better to treat these as black box systems from which data can be extracted and then processed in new systems, such as accounting hubs, which can provide the functionality required to satisfy the banks management, shareholders and regulators alike.
Complexity should not be used as a mitigating factor to avoid the systems change that is long overdue, for both business and regulatory reasons. Failure to do so will leave both banks and regulators at a disadvantage.