Economist article on IT systems effect on the financial crisis

Economist has an article on the relationship of IT system and the financial crises.

The article starts by pointing out financial services spends $500 billion globally annually on IT, according to Gartner.

Banks and information technology

Silo but deadly

Dec 3rd 2009
From The Economist print edition

Messy IT systems are a neglected aspect of the financial crisis

NO INDUSTRY spends more on information technology (IT) than financial services: about $500 billion globally, more than a fifth of the total (see chart). Many of the world’s computers, networking and storage systems live in the huge data centres run by banks. “Banks are essentially technology firms,” says Hugo Banziger, chief risk officer at Deutsche Bank. Yet the role of IT in the crisis is barely discussed.

The point of the article is the silos of IT made it difficult to see the overall risk.

This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm. Insiders at Lehman Brothers say its European arm lacked an integrated picture of its risk position in the days running up to its demise.

But is IT really the cause or its the people who refuse to work with other groups?  IT has grows so large because users want to own the data systems, as information is power.   As the economist points out the problem was discovery of issues across systems.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm. Insiders at Lehman Brothers say its European arm lacked an integrated picture of its risk position in the days running up to its demise.

Due to the power of IT industry, people focus on going faster.

But many other banks are still in firefighting mode, says Mr Mestchian. Much of the money invested in IT still goes into making things faster rather than more transparent.

The change needed in IT is to think more about transparency of their systems and how they work with other systems.  This is will happen as social software systems permeate more of IT.  The old term was collaboration, now it is is social software/networking.

Imagine if twitter and facebook worked in a financial systems IT systems.  Could you discover issues faster?

Comments

[Markets in Financial Instruments Directive]

With an accurate CMDB and a good Change Management policy, meeting the requirements of Basel II can be accomplished faster and cheaper. Both are about managing operational risk, which, from an IT perspective, can only be done by understanding the IT infrastructure and adhering to the ITIL processes to avoid disruption to the IT services that in turn directly affect vital business functions (VBFs) and the underpinning data.