IT's role in avoiding another banking crisis

The banking industry is built on technology; the regulation that governs it should be as well. 

There is a very real danger that policy-makers will overlook one critical factor in their regulatory offensive on the banking industry; the role of technology – especially IT.

High-profile issues such as the inquiry into competition; the possible split up of the banks as a response to fears of systemic risk; and the examination of a perceived lack of finance for the UK’s businesses represent just a small cross-section of the regulatory pressures that the industry is currently facing. There are many more.

It is not unreasonable to fear that if this one key factor is ignored, the foundations upon which reforms of this breadth and scale are built will crumble.

It is technology that underpins the 5.7 billion automated payments that are made through the UK’s banking system on an annual basis and without which the 40 million online bank accounts that are registered in the UK would not be able to function. It is IT of varied sophistication and application that underpins a multitude of front and back office functions in every financial services organisation in the world.

It is technology, therefore, that should be front and centre of policy makers’ considerations when they examine the regulatory options that will shape the industry for years to come. Unfortunately, this is not currently the case.

By facilitating greater, more accurate flows of information within and between banks, technology can diminish the threat of bank failure and systemic risk. Many Intellect members believe that had regulators been able to view the build up of systemic risk at an earlier stage and act appropriately, a real possibility with today’s technology, the negative effects of the 2008 banking crisis could have been significantly reduced.

Moreover, in the event of such a failure, the processes that will be in place to ensure that customers are guaranteed to get their money back rely on IT. It is these systems, when implemented, that will play a significant role in increasing customer confidence in their banks, tapering fear for the safety of their money and reducing the chance of another run on a bank.

By allowing new entrants to go to market with technology-enabled banking products and services, there is also the prospect of greater competition and choice for consumers. Indeed, technology can tread where regulation dare not – by helping to make it commercially viable for banks to lend to a wider cross section of suitable SMEs.

However, there are also technology-based risks that equally need to be understood so that, where possible, they can be mitigated. The 'Flash Crash’ of May 2010, where the Dow Jones Industrial Average plunged 600 points and then recovered in the space of 15 minutes demonstrated how a system that relied upon technology to function could potentially be destabilised by this very reliance, with knock-on effects for the economy. Similarly, the intertwined legacy IT systems that many established banks’ business-critical operations are built upon, represent an obstacle to business change to meet ever-evolving regulatory, consumer and market pressures.

It is common sense, therefore, that if policy-makers and regulators are to ensure that regulation is effective, but not unnecessarily restrictive, they must have an understanding of how the IT in banks works. It is now fundamentally impossible to do this without appreciating the technology that not only underpins existing banking institutions, but will drive changes to their operational and business strategies, the way that they interact with customers and the role they must play in the rejuvenating and driving the wider economy.

This is a call to action. Both to policy-makers and regulators who could do more to understand the cornerstone of the 21st century banking system, but also to the IT industry which needs to step up and provide a sounding board to match technology capability with regulatory proposition. From the vendor community that provides these systems, to the CIOs within the banks, they are the natural source of expertise that will allow the ‘art of the possible’ to be realised.

John Higgins is director general of Intellect, the trade association for the UK IT industry.