As the finance industry unearths itself from the financial crisis, regulators have turned their attention on ensuring history doesn’t repeat itself. With the policy makers determined to reduce the need for a repeat on potential tax payer bail-outs, the Bank of England has introduced ring-fencing plans, which are set to come into play in 2019.
The ring fencing regulations require high-street banks to significantly scale back their investment banking arms and rethink their strategies. The ring fencing process will force banks to keep their retail banking completely separate from risk taking investment operations, to protect retail banking and its customers.
Ring fencing will be applied to any institution that possesses the deposits from individual or small business that combine to a value bigger than £25 billion. Banks will instead be re-shaped into a holding company and independently capitalised ‘sister’ subsidiaries that are handled by their own directors. This process of creating individual entities will create the need for banks to appoint different boards, employ separate staff, different supply contracts and pension schemes, among other tasks.
The ring-fencing plans are based on the major banks having to overhaul the way they run their operations to convince the Bank of England that the banking industry can protect consumers if their businesses encounter trouble in the future. With such huge regulatory and structural changes required, banks are understandably concerned about the impact this could have on their business.
Out with the old, in with the new
Splitting out banks is a complex and risky task and could lead to huge expense outgoings, as banks are required to separate and rebuild IT systems and infrastructure that were not designed to be split.
The key issue is that when the ring-fencing regulations come into play, banks will be forced to make changes to their banking platforms, which were largely developed in the 1960s and 1970s. With banking IT largely a convoluted mess, thanks to decades of adhoc tech upgrades, even separating out one banking functionality would be a challenge. The removal of entire layers of banking functions would be entirely impossible and could pose a risk to the stability of the rest of the system.
So the question is how can we introduce the ring fencing plans without disrupting banks’ entire business operations?
Banks should start embracing new infrastructure models immediately, if they are to meet ring-fencing requirements by 2019. A Service Orientated Architecture (SOA), which separates processes into business functions, would help to untangle the mess of the current infrastructure into building blocks of predefined business services. By categorising banking technology and business functions in this way, splitting banking activity would become a more simplified and structured process that still cannot be underestimated
Aligning to a set business IT structure that is standardised across the whole international banking industry would also enable banks to buy technology components ‘off the shelf’ and add them to the network – allowing business technology to be updated as and when required, rather than disrupting the whole system.
Moreover, by sorting out banks’ underlying technology issues, banks will be able to prepare themselves for the future. Regulators are unlikely to stop at ring-fencing banks in their quest to straighten out the banking industry. Not only would structured business IT architecture allow banks to keep up to date with regulations, as inevitable new changes come into play, but also reduce changeover time and cost.
The ring-fencing regulations may be causing a headache for banks at the moment but by taking advantage of this momentum, banks could simplify the process of updating their customer offerings, reduce their IT headache and costs and last but not least, keep their customers happy.
Sourced from Hans Tesselaar, BIAN