Ringfencing could force banks to move to shared service model
Mark Jenkinson, Capco Partner, UK banking team, says Vickers' ringfencing proposals for UK banks could lead to a shared service model where IT and other infrastructure is separate from the rest of the bank.The banking system faces sweeping reform following the Independent Commission on Banking’s final report. Sir John Vickers’ proposals include the ringfencing of banks’ retail and investment arms in a bid to protect consumers by preventing banks funding their riskier investment activities with retail deposits. Ringfenced retail divisions are required to have a separate board of directors and equity capital equivalent to 10 per cent of risk weighted assets. Vickers would like his Commission’s recommendations to be enacted as soon as possible. However, he believes that these reforms will be ‘far-reaching’ and as such he recommends an ‘extended implementation period’ with a final deadline of the start of 2019 – in line with Basel III.
Clearly the mantra of ringfencing is to deliver separate operational entities. However, where does this leave IT as a key enabler for both divisions? There are suggestions within the banks that they should have ‘operational subsidisation’ – a term meaning that the infrastructure needed for a bank to operate should be in a separate entity from the rest of the group. From a technology viewpoint this ‘entity’ could operate across the bank divisions as a shared service type model, with the necessary ability to segment functional and technology aspects should the need arise. This means that if a bank’s investment arm were to experience problems and go bankrupt, the retail arm would not be impacted and could continue IT operations. Effectively, an infrastructure-protected model means that banks are able to continue to process transactions, manage staff and buildings, and hold intellectual property.
This new operating entity could include data aspects as well, with effective data management protocols in place to allow customers to be segmented across the bank, with limited cross fertilisation and data not directly aligned to either the retail or investment arms. Data would and can be used for both product elements – ringfencing particular customer sets based on the products within the retail or investment arms, and also for reporting requirements. The ringfencing boundaries and lines have not been defined by the ICB so there is no mandated data operating model to be adhered to across the distinct entities.
From a purely IT viewpoint, the shared service model would avoid duplication of functions, services and operations and allow the core essence of the ring fencing approach to be maintained. This would ensure the bank can continue trading and operating even with particularly functions or product lines being terminated due to financial difficulties.
For transaction banking, the report does not specifically highlight the way a ringfenced bank should make internal and external payments and the best use of internal liquidity. However, the larger the company and the more countries it operates within, the more complex the ringfencing adherence will be. There are tax, regulatory and security issues to be considered once a ringfenced entity model is in place. The ability to set up new models for cash management across the different entities will be as key as the funding lines in place to be able to transact business.