Splitting out banks: the good, the bad and the risky

by Hans Tesselaar, Executive Director at BIAN
Publication: RetailBanker

As our financial systems begin to emerge from the ashes of the credit crunch, governments across the world are looking to improve stability in the banking sector. There are a number of ways of doing this. Yet the Commission on the Structure of Dutch Banks, established by the Dutch Minister of Finance, may be one of the first to formally suggest the implementation of Enterprise Architecture as one such solution, writes Hans Tesselaar

If you’ve followed my blogs you will know that I am in favour of the promotion of an Enterprise Architecture in the banking sector and I welcome the recommendations made by the Commission on the Structure of Dutch Banks.

Government intervention in the financial services typically takes the form of risk-reducing regulation. Take for example Basel III, designed to ensure bank capital adequacy and liquidity. For European countries the incoming EU banking union legislation is a further consideration — designed to contribute towards financial stability in the Eurozone.

The next round of legislation, which gives strong powers for the supervision of all banks in the Eurozone, is due to be announced in the coming weeks. This is just another example of how governments are looking to ensure system stability. One final option for limiting risk profiles of banks, but which is rarely undertaken due to the complexity involved: the splitting out of the bank.

This is precisely why the Commission on the Structure of Dutch Banks set out to investigate how governments can best improve the bank system, looking at serviceability, competition and stability — and specifically how to reduce the risk associated with separating out a bank into different functions.

The subsequent report ‘Towards a serviceable and stable banking system’ identified Enterprise Architecture as a key element in a future banking system which better ticks these boxes of serviceability, competition and stability — namely due to the role it can play in reducing risk when splitting out a bank. The fact is that at present, in the event that banks do need to separate out their functions, the existing large and complex IT systems can provide an added risk element which breaks down the attempt for splitting the bank out in the first place.

The Commission report argues, however, that the implementation of an Enterprise Architecture, which provides coherent IT system principles and structure based on a common framework, reduces this level of complexity — facilitating the splitting out of troubled banks in case of emergency.

Enterprise Architecture is currently underutilised for a number of reasons — the financial and operational risks associated with changing an IT system means banks tend to upgrade existing systems in an ad-hoc fashion, or put off upgrades altogether. What’s more, until recently we saw an ecosystem in which banks felt the need to compete on all aspects of banking, including their back-office systems.

The tide is turning though, as banks, IT vendors — and now governments — are coming to appreciate the benefits of an industry standard-based, common infrastructure.

We must all work together to ensure the global banking system is as robust as possible — and Enterprise Architecture, combined with a common framework embraced by all parties involved, is likely to be a key factor in this.

Could anything now hold back the tide? Let me know what you think.