Big Spending But is It the Right Spending

Big Spending But is It the Right Spending

Big Spending But is It the Right Spending

Looks like tech spending will continue in the big banks ($188bn up 4.4% on previous year, see eFinancial news), but how effective is this spending is the real question to ask. Most of this spend is on the big regulatory initiatives and I would argue (based on real world experience) that almost the entirety of the spend on Basel 2.5 and Basel 3 was a complete waste of money. Why?

The overall objective of these Basel initiatives was to force the banks to hold more capital and they did this by introducing more quantitative capital charges (Stress VaR, Comprehensive Risk Measure, CVA, Stressed PFE etc). The problem is that these measures are in no way used for any real management of risks within the banks but are purely used to drive the capital numbers (completely against the "use test" which is one of the principles behind an internal models-based approach). A far more effective mechanism would have been for the regulators to simply increase the "multiplier" (a factor which provides accounts for inaccuracies in the current models but could be increased to account for the missing risks identified by the Basel 2.5 and 3 papers).

A far better use for this money would have been to spend it on the latest Basel paper (BCBS239) which takes a very different approach. Instead of prescribing another measure to to the long list of regulatory measure that are ignored, it goes back to a principles based approach and asks banks (G-SIBS specifically) to ensure that their infrastructure meets the requirements of those principles. This is a very useful paper and the principles are spot on, however as with any principle based approach the interpretation is tricky and, unlike the Basel 2.5 and 3 papers, are not easily codified into a set of requirements that can simply be handed to a team of IT developers to implement.

This principles based approach is however an opportunity, for those banks that are willing to see it that way, to re-vist their outdated infrastructure. The way forward is not easy and unlike the man who asked "how do I get to XYZ?" who received the response "I certainly wouldn't start from here!", banks have no choice but to start with their existing systems. The roadmap will be long and difficult, but with the right technology enablers and governance practices, it is indeed possible.

About the Author

Gavin Slater Gavin Slater

Gavin has 22 years experience with Consulting and Investment Bank. In his previous roles he held positions as Global Head of Risk Infrastructure with a focus on Market and Credit Risk. Gavin has managed large and complex delivery organisations as well as being the primary contact managing the overall relationship for Risk with key regulators, in particular the FSA in the UK and Fed and SEC in the US.

  •    28 Marshalsea Road
         London
         SE1 1HF
         United Kingdom
  •   +44 (0)20 3627 2908
  •    info@stream-financial.com

About Stream Financial

We enjoy those intractable business problems you hate. We employ our experience and leading edge software solutions to help your organisation realise it’s full potential. Our approach is widely effective for business processes across all organisations and business sectors.


Read more

Request a Demo


Request a Demo