HSBC's plans to create a single
anti-fraud system for all of its different banking products across
the globe is an example of the technology that banks will have to
implement to comply withBasel 2.
The international regulation, which comes into force in January,
requires that banks ensure they have enough cash reserves to cover
the financial cost of problems in the business, including fraud and
IT failures.
Banks must be able to measure risk across the business so they
can ensure they have enough cash to cover any losses. To do this
they will need IT systems that can monitor activity across the
entire organisation.
HSBC said last week that it had started developing software to
be used across multiple banking channels, with the ultimate aim of
a single view of a customer's exposure to fraud.
Although HSBC said the project was not motivated by Basel 2, it
will enable the bank to monitor fraud risk across the entire
disparate organisation, a key element of the regulation.
Derek Wylde, head of fraud risk at HSBC Group, said the bank
believes that the technology will, by reducing losses, have a
positive effect on HSBC's drive to comply with Basel 2.
Fraud detection has happened in silos for too long, he said.
"The holy grail is one piece of software monitoring all payment
channels."
Ralph Silva, business analyst at research firm TowerGroup, said
all banks are moving in this direction because they have to.
Although the best way of monitoring bank fraud is through a single
system, most banks are adding a layer of technology to their
infrastructures to connect disparate systems.
"More often than not, banks are taking all their anti-fraud
systems and putting another system on top to assess the overall
risk profile," he said.
However, the drawback with this approach is that each individual
system may calculate risk in a different way, which could lead to
an "apples and oranges comparison", he said.
Creating a single view of fraud risk will be an expensive
exercise for banks with ageing systems, said Silva. He estimated
that at least half of European banks have a system that is more
than four years old.
The task will be easier for banks that have invested in modern
risk management systems in the past three to four years because
the systems have been designed to meet risk management
compliance.
Although Basel 2 has introduced more costs to banks, investing
in technology to provide the holistic view of the business that is
required will offer a return on investment, said James Burns, CTO
of financial services at Microsoft.
By having an accurate picture of the total cost of risk to the
entire business, banks will be able to free up cash for business
activities, he said.
"If banks do not know the risk profile of the whole business
they will have to keep more money than required in reserve," he
said.
"This is why we are seeing phenomenal growth in high performance
computing in the financial services sector. They need to analyse
the risk profile of complex financial products."