We use cookies to provide you with a better experience. If you continue to use this site, we'll assume you're happy with this. Alternatively, click here to find out how to manage these cookies

hide cookie message
Financial sector CIOs face headaches over Treasury’s plans to ring-fence banks

Financial sector CIOs face headaches over Treasury’s plans to ring-fence banks

Analysts and commentators argue that IT bank chiefs need to create agile infrastructures to prepare for the separation

Article comments

In the wake of the global economic crisis, which saw the UK government spending billions of pounds of taxpayer’s money on bailing out banks that had retail and investment arms inextricably linked, regulators went to work to establish reforms that would prevent further public money being thrown at the financial sector if another severe shock were to hit the economy.

This regulation is taking place at a national, European and global level for large banks and is increasing in complexity. The most recent plans were revealed by Her Majesty’s Treasury late last week with the release of a whitepaper, entitled ‘Banking Reform: delivering stability and supporting a sustainable economy’, which reaffirmed plans by the Independent Commission on Banking to overhaul the banking sector.


Although many will be concerned with the capital requirements that are to be forced upon firms in the City, where banks will need to hold 17 percent of their assets in a bid to absorb any losses, a greater concern for IT chiefs will be the ring-fencing conditions. As of 2019, banks will have to have their retail and investment arms completely distinct operations, in the hope that if the investment side of the business fails, the retail side will remain protected.

The whitepaper states that “where the operational infrastructure of a banking group – its management information systems, information technology, employment structures etc – present a barrier to the separation of a ring-fenced bank and continuous provision of its services, the government believes that the regulator should, consistent with its existing objectives and its objectives under the ring-fencing legislation, require firms to make appropriate changes to their operations”.

Daniel Mayo, practice leader of financial services technology at analyst firm Ovum, says that these guidelines will have a big impact on IT in the City, as any shared services strategy that banks have been implementing in recent years will have to be separated.

“There is a need to create more distinct units within the bank. This means on the infrastructure side of things, such as datacentres and the common use of networks,” said Mayo.

He adds: “Difficulty to separate these will really depend on the structure of the banks. The only advantage is that the capital markets side of things tend to be relatively separate anyway, as they have been focusing on speed, flexibility and speed to market, which means that the applications are fairly disparate.”

However, Mayo argues that IT chiefs are going to have to undergo an extensive audit to establish exactly where systems need to operate separately, which could be problematic.

“It is going to difficult for CIOs to manage and plan any sort of separation. The headache is that there is quite a lot of work in terms of just understanding which systems need ring-fencing and which don’t. That’s a real pain point,” he says.

Unravelling 15 years of work

Financial services think-tank Balatro’s chief executive, Chris Skinner, agrees with Mayo on the separation of shared services point, and suggests that the unstitching of shared services will be costly for banks that are already facing stringent regulation around holding increased levels of capital.

“Like most businesses, banks will have common technology services around HR, marketing and finance, which are typically shared. It’s how to unravel these shared services that is the big question,” says Skinner.

Skinner argues that separation of these shared services is essential for compliance, as if an investment arm of a bank failed and needed to close, having an ‘umbilical cord firmly attached’ to the retail arm in terms of a shared service would not work.

He adds: “This ring-fencing will certainly increase investment, because essentially what is being asked is that all the work that has been carried out over the past fifteen years in terms of sharing services now has to be duplicated and separated for the individual banking arms.”

Seeds of doubt

Another concern for CIOs with regard to planning for these changes is that none of the regulation is guaranteed, which has been reinforced by a number financial sector reforms being broadcast and then pulled back or altered due to pressure from the banks.

Hugh Cumberland, senior financial services consultant at Colt, says that this has created ‘doubt’ in the banks’ leaders.

“The banks will take their time to implement this, there is going to be a nagging doubt in the back of an executive’s mind as to whether or not things will change,” says Cumberland.

He adds: “This is a consultation paper that has been put out by the Treasury. Things are not set in stone and other changes might come in. The banks will understandably string this out for as long as they can, and if they are given until 2019, they will take until 2019.”

Both Skinner and Cumberland argue that this doubt should lead banks to create an infrastructure that is flexible enough so that when things are clear they can move easily to separate operations.

“What I would be looking to do is get in place a really flexible, agile infrastructure where I can buy compute and storage on demand, even though this goes against how banks traditionally operate,” says Cumberland.

Skinner concurs by adding: “I don’t think the banks will do much until it is clear what the landscape is. However, if I were a CIO at one of these institutions I would be sitting there asking myself how can I ensure that I am agile enough to take the lead when it is?”

The Treasury’s whitepaper can be read in full here.

Share:

Comments

Send to a friend

Email this article to a friend or colleague:


PLEASE NOTE: Your name is used only to let the recipient know who sent the story, and in case of transmission error. Both your name and the recipient's name and address will not be used for any other purpose.


ComputerworldUK Knowledge Vault

ComputerworldUK
Share
x
Open
* *