Who's afraid of the big, bad bank?

We are now five years on from the Credit Crunch of 2008 and the scars of past bank instability can still be seen. As such it is unsurprising that policymakers are now looking at new solutions for securing the future stability of the banking system. For a number of governments one potential method is the splitting of banks into good and bad.

It is easy to see why this idea has proved so popular. For one thing, the risk profile of a bank is significantly reduced by ring-fencing trade activities.  As such, the stability of a bank is greatly improved. What’s more, the splitting out of banks also offers the potential to improve banking competition, breaking the stranglehold of the Big Five bank players. The idea clearly offers a number of benefits – and has recently been given a boost in the UK with an open letter from the Commission on Banking Standards, backing further examination into how the solution would work in the UK.

However, questions need to be asked around the plausibility of splitting out a bank into separate functioning entities. In the UK, Vince Cable recently made this argument when he pointed out that if a bank were separated into two smaller, functioning entities, there would be great expense involved as IT systems that were never designed to be divided would need to be separated out and rebuilt.

The same question has also recently been tackled in the Netherlands, where the Commission on the Structure of Dutch Banks has investigated ways in which the risk aspect of splitting out a bank can be reduced. For the Dutch system, it has been deemed essential that banks be set up in such a way that in a state of financial emergency they can be split out easily and with limited risk.

For regular readers of my blogs it will come as no surprise to learn that I welcome the findings of the Commission on the Structure of Dutch Banks. It recommends the implementation of an Enterprise Architecture, a structure of organising IT processes by bank functions, as the optimal base framework for the banking system.

Where current banking systems are typically intertwined spaghetti-like structures, built-up in an ad-hoc fashion over decades, an EA framework would allow changes to be made to separate business function processes without risking negatively impacting the overall system. As such, system stability would be greatly improved in such a system. What’s more, it would then be simpler – and less risky – to split out bank functions in a case of emergency.

There is no easy and low-cost solution to the question of how to improve the stability of our banking system – if there was, we would have done it by now. But I welcome discussions on how to achieve this, particularly those around the benefits of Enterprise Architecture.