Banks need to plan separation of investment banking and retail banking IT

Government may separate investment and retail banks through ring-fencing

With the government planning legislation to separate investment and retail banks before the next election, banks will have the justification needed to start work on splitting IT systems.

The decision to separate the retail and investment operations of banks through ring-fencing follows the Independent Banking Commission (IBC) recommendations, which were drawn up after the retail operations of UK banks suffered after the 2008 financial crisis.

Using ring-fencing to separate the money flows in the banks will ensure investment banks are not putting retail banking at risk by investing reserves. This means IT systems and IT services contracts will also need to be distinct.

As well as individual systems requiring separation, entire IT operations and outsourcing agreements may have to be restructured before the recommendations come into force. Despite the IT work required, ring-fencing is seen by many in banking as less harsh than a complete separation.

Speaking to Computer Weekly in 2011, when the ring-fencing was announced, Jean Louis Bravard, IT outsourcing consultant and former CIO at JP Morgan bank, said separating systems will be a major challenge.

"A lot of the systems were built in the 1960s and 1970s using Cobol and bells and whistles have been added later. The people that built them have either died or retired," he said.

Bravard added that many of the systems were not properly documented: "How do you undo the puzzle without the manual?" 

In the 1990s, the internet arrived and different legacy systems were increasingly integrated which has added further complexity.

One banking IT source told Computer weekly that the biggest challenge will be separating infrastructures. “If you have shared datacenters and share IT outsourcing contracts it will be difficult and potentially expensive to separate," he said.

Since the IBC report, bank IT systems have been in the news. The outage at the Royal Bank of Scotland that left customers unable to access bank accounts for a week in 2012 has brought IT into the focus of regulators. 

The bank was fined a combined £56m by the Financial Conduct Authority and the Prudential Regulation Authority last month. Banks will have to tread carefully when splitting systems to avoid facing potential fines for downtime.

The banking source said that banks are already planning for ring-fencing, but he said it is still in question “how rigorous the regulators will be around shared outsourced services including offshore service.”

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