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COMMENT


Operational and tech risk: the real challenge for banks


Keith Saxton, Independent Director and Advisor and former techUK Chair of the Financial Services Council


Operational risk has attracted a lot of attention over the years. This is mainly because it incorporates many of the major issues facing the banking sector today, including cyber, infrastructure, regulatory compliance and data breaches. And it will continue to grow in importance and take up more attention and costs.


The Basel Banking Committee recently signalled an overhaul of the way banks should calculate their operational risk. Instead of developing their own risk models, they will have to use a standardised approach laid out by regulators. This is intended to introduce a degree of risk sensitivity to incentivise them to improve their operational risk management. Despite the comprehensiveness of the BCBS approach there are still challenges that need to be addressed. Nowadays, software is one of the major sources of technology risk for banks. A global, standardised approach such as those provided by the Consortium of IT Software Quality helps banks assess the level of software risk they must report.


The latest Financial Services CRASH Report from CAST reveals the UK FS sector is delivering applications ‘at the highest risk’ of failure and that application performance falls short in comparison to other parts of Europe and the US. Clearly, a bank suffering a complete IT and operations meltdown, will fail. Operational risk management includes a focus on data and systems. Upgrading core systems, which are often outdated, means implementing robust data architectures, and ensuring security and operational resilience. Following the latest CMA ruling, legacy banks will face the challenge of completely digitising their systems by 2018, so will be required to address their core systems sooner rather than later.


The last number of years has seen a consistent, heavy focus on risk and compliance issues. Technology risk is a big part of operational risk, and less understood by


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regulatory teams. Underpinning, technical excellence is needed. Shareholders and regulators have been so focused on operational considerations that they have failed to understand and examine if the IT infrastructure and software quality of banking systems are actually capable of supporting these new industry standards. For traditional banks just focused on ‘keeping the lights on,’ legacy modernisation efforts can be quite costly and time-intensive.


Challengers have a natural advantage here; a lot of them are up and running very quickly, using the cloud and API. All good, but at some stage they need to prove these applications are robust, secure and scalable. Of course, they don’t carry the cost and complexity of legacy systems. However, as they are delivering more discrete services, the same regulatory hurdles will apply.


As part of their business operating model, newbies are adopting an approach where they buy in specific services rather than build everything for themselves. Big banks, who are effectively software and tech companies, need to run a robust infrastructure. Largely owned in house, the complexity is now accounting for significant operating budget and restricting change. The challenger approach presents new challenges for IT sourcing and managing vendor quality while keeping systems cohesive.


Challenger or incumbent, successful institutions have to delicately balance regulatory requirements with their technical capacities. By analysing their software estate, banks will better measure and manage operational risks for their complex, multiple technology infrastructures. Those who can master this process will be the ultimate winners. This is the real challenge.


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