• Peter Farley, Capital Markets Strategist at Misys


• 13.09.2016 08:30 am
undisclosed

A recent article in the Wall Street Journal (WSJ) argued that an absence of IT awareness led to a fear of technology-led change and consequently an inertia and rejection of IT transformation. The paper saw transformation as essential to improve a bank’s longer-term chances of survival and even used a strong statement to express the concept: “They (the bankers) must die so the banks might live”.

IT-savvy bankers I discussed this with fully agree and there was also a significant minority who further believed that much of the substantial sums being spent on IT in banking (over $360 billion in 2016, according to Gartner) are being wasted due to a disconnect with the need for completely new business models.

The wrong direction?

This all brings me back to the recent stress tests conducted by the ECB. These tests drew criticism because of the narrowness of their focus (capital buffers) and the absence of a plan (or even suggestions) that could rectify any of the identified weaknesses within the 51 banks examined. They also didn’t address any perceived failures in the wider system itself.

It could be argued that the basis for the ECB tests was flawed from the outset. They were designed to probe for weakness within individual banks but the assumptions made around the capital that banks are currently holding as a buffer against losses (and the ability of that capital to absorb any losses) was misguided in its singularity.

The focus was almost solely on capital and risk. When we tie this back to the WSJ’s conclusion, it could be argued that the key focus of the ECB’s analysis was fundamentally wrong. Perhaps it should have been on the people – the bankers – not the business?

This was a real opportunity for regulators to become a catalyst for more meaningful change, but there was an obvious disconnect in that they were only testing for stress versus the banks’ current capital situations, meaning they were looking at the wrong weak links.

Transformation

The OODA (Observe, Orient, Decide & Act) Loop, an aerial warfare concept from the 1960s designed to enable fighter pilots to maintain a competitive edge over opponents in close combat, argues that a successful strategy must favour agility over raw power when dealing with opponents. The successful adoption of this approach on a much wider scale led to the USAF ditching powerful but unwieldy fighter bombers in favour of more speedy and maneuverable planes.

How is this lesson relevant for banks? Rather than persevering with outdated models, banks must look at transformation and perhaps embrace this model urgently and higher up in the organisation.

… And that’s where the people come into it. Technology is not enough; it will be the ability to use it to make a difference that counts. According to a recent report by Accenture, less than 6% of bank boardroom members and less than 3% of bank CEOs have any professional IT experience. The report also stated that, of more than 100 of the largest banks surveyed, 43% had no board member with IT knowledge and only 11% of banks had technology committees at board level.

The right places to look

The message is clear: the banking industry has to accept the realities of the challenges it faces and confront those head on, rather than fear a future with a new business model. It is a big decision to make and most banks need better qualified people in order to do it.

Some banks have already made this leap thanks to transformative technology, which is helping them become more agile and efficient. But did the ECB scrutinise these forward thinking organisations? Probably not.

The industry has to be able to identify the problem before being able to come up with a solution.

Rather than focus solely on the mechanics of the banks, the ECB needs to look at their business models and the executives who devise and drive what are often just de-risk strategies, and decide if they are fit for purpose in today’s technology driven environment. Then, possibly, the bankers won’t have to die for businesses to survive, just embrace new techniques and people.