A new prudence

What prudent investments did financial services firms make in technology to improve compliance, reduce financial crime and lower their operational risk profile when times were good?

Where are the systems and controls that could have prevented so much of what has happened? Or helped mitigate the effects of problems at other firms?

 

Moreover, what attention did the Basel Committee on Banking Supervision pay to this issue?

The most important thing the Basel Committee could do today to prevent another crisis like the current one is to call together a group of 'wise men (and women)' to discuss how to improve the way financial services firms regard investment in op risk and compliance technology. I'm thinking here specifically about technologies to help improve operational systems and controls; prevent fraud, market abuse and other forms of financial crime; improve data security; and better enable enterprise-wide assessment and reporting on operational and compliance risks.

Financial stability isn't just about regulatory capital - Basel II was developed to specifically acknowledge that capital itself isn't enough, that it is risk management practices that make the difference between good firms and bad.

I say that technology matters too. And while regulators have no business getting involved in the nuts and bolts of just what firms buy and how they implement it, it seems to me that they have a vested interest as the Guardians of Financial Stability in fostering a meaningful dialogue with banks about what kinds of technology they should have in place, and with the solution providers about what they perceive as being important and helpful.

A model for this kind of dialogue could be the interaction between the industry and regulators around over-the-counter derivatives transaction processing. Regulators have used a mixture of carrot and stick to motivate the industry, and now the industry - having seen just how close disaster can come when deals don't get processed - is now seeing firms call on other firms to get the right kit in place.

Normally I believe that less can be more in terms of regulation, but when it comes to op risk and compliance technology investment, it seems to me that financial services firms have, for the most part, failed to have enough respect for the importance it can play not just for the survival of their own firms, but for the financial system at large. Regulators need to step in to help the industry raise its game.