It’s time to shine a light on banks’ data problems

Here at OBASHI we believe that there is a pressing need for finance to “understand precisely how its product [money/data] flows and interacts with people, process and technology”.

This belief was further reinforced recently by the BBC’s ‘Business as Usual’, a radio documentary about continuing complexity in the financial sector.

The programme demonstrated that, although regulators have pledged to make global banking safer and more transparent, many financial professionals are still concerned about the lack of transparency associated with particular products.

For example, synthetic Exchange Traded Funds (ETFs) are said to ‘hide a forest of financial engineering’.  One academic said, "When you start working through the complexity of these transactions, you start to get scared."  According to the BBC’s Michael Robinson, another expert highlights, “long chains of transactions between investment banks, ETF providers and hedge funds...another serious source of potential instability.”

Back in the blogosphere, an anonymous financial professional comments on the derivatives market,

‘At the end of the day, every trade spawns a chain of trades and only the ones at the ends of the chain are exposed to the underlying risk...What we need is greater transparency about who is at the end of the aforementioned “chains”. This information needs to be visible to regulators who can monitor it...’

Meanwhile, in a recent speech in Beijing, Andrew Haldane of the Bank of England outlined,

‘...how dramatic shifts in the structure and speed of trading have increased abnormalities in the pricing of securities. This new topology of trading has potentially increased systemic risk...’

And in a discussion of some long-standing technical issues associated with finance IT, Allan D. Grody reflects that,

‘The regulators walked into the basement of Lehman Brothers and found our industry’s leaking plumbing problem - faulty, non-standardized data. They understood then why they had no ability to easily and automatically aggregate needed granular data across company business silos and certainly no ability to aggregate such data across firms.’

More broadly, Intellect, the trade association for the UK IT industry believes that [5MB pdf, p.3]

‘Data from banks was of an insufficient quality for regulators to spot and mitigate the financial crisis, and there has been no change in this almost three years later.’

So I think it’s fair to say that finance needs to address a number of key issues associated with the flows of data that are its life blood,

• Complete clarity in  transaction “chains”
• Understanding precisely how each flow of data traverses the financial system
• Connecting silos within businesses
• Communicating clearly with regulators about risk

Granted this won’t happen overnight; well-engineered solutions don’t work that way. They only work when everybody involved has a clear shared understanding of what has to be done, their role in the actions and how they are impacted by these changes. Clarity, vision and communication will be at the heart of the solution.

However, Chris Skinner of the Financial Services Club Blog argues that in the current ‘turbulent times’, banks are struggling to prioritise the strategies of growth, innovation, cost cutting and risk, and he criticises them for being ‘tactical and reactive’ and not having ‘direction’.

A major part of the explanation for this lack of direction is the lack of clarity about how data, ie. money, flows through the businesses of the financial sector.

After all, in today’s digital world, how can you make the best strategic business decisions when you don’t fully understand the internal connectivity of your own business, let alone its interconnectivity with other businesses?