February 1st, 2013: a memorable day in the Dutch banking industry. One of the “systematically important financial institutions” (SIFI) of the Netherlands was nationalized. This happened years after the first banks were given state support or were nationalized in the aftermath of the credit crunch. The Dutch Central Bank, and the Dutch Ministry of Finance, say that it could not been done otherwise – there were no means to split the bank into a healthy part and a unhealthy, "bad" bank. Nationalization is the only option to prevent a financial crisis.
Splitting a financial institution
The prospect of splitting a financial institution, usually part focused on regular retail banking, and part aimed at investment management, has become a hot topic. Politicians and citizens alike do not accept the bail-out of troubled banks with taxpayer’s money. The Central Bank, the Ministry of Finance, and the financial industry face a big challenge. “Never again”, is a phrase that has lost a bit of its meaning, but which has been uttered continuously by many experts analyzing the case.
A lot of regulation is underway to make splitting a viable option. In Europe, the Liikanen Expert Group emphasized the need for banks and other financial institutions to draw up and maintain effective and realistic so called “recovery and resolution plans”. The objective of such plans is to ensure the resolvability and operational continuity of critical functions of a financial institution. It should be possible to split up an institution in a couple of days (usually a weekend), to prevent awkward side-effects such as bank runs. As we speak, the Central Banks are urging the banks to make such recovery and resolution plans (due end 2013). Splittability is a conditio sine qua non in these plans.
How do we achieve splittability?
Obviously, the notion has many aspects: financial, legal, and, last but not least, operational (which is basically everything apart from the financial and legal aspects that usually suck up all the attention). What about the processes? What about the information and the underlying data? What about the Information Technology? Just a few minor, operational details…
In the Government Committee on Restructuring the Dutch Banking Industry (commissioned by the Dutch Finance Minister, headed by professor Herman Wijffels, and a follow-up on the Liikanen Expert Group) we try to answer these questions. We acknowledge the importance of IT in the financial industry – actually, a bank is completely dependent on it. We acknowledge the importance of data, and the issues around, for instance, data quality, or security. We look at the processes and the governance of financial institutions. All to make sure, that splittability is indeed an option. To make sure that the recovery and resolution plans can be effective, if needed.
Enterprise Architecture and splittability
Maybe not surprisingly, we stress the importance of an “old friend” of the readers of this blog: Enterprise Architecture. The only way to achieve splittability in a manner that safeguards the continuity of at least the healthy part of a bank, is to have a structured overview and a set of principles governing the bank. Enterprise Architecture provides just that.
Enterprise Architecture can also reduce the enormous amount of regulation, which is a heavy burden for the banking industry. A set of elegant principles can replace the rules, and reduce bureaucracy and complexity.
Enterprise Architecture is not new to banks. Many have invested millions in it, some for more than twenty years. What’s new, is the regained importance. An importance acknowledged by the Government and the Central Bank. This revival will bring Enterprise Architecture to the agenda of a bank’s Board of Directors – a prerequisite for the success of implementation that is still failing in many organizations.
Prof. Dr. Frank Harmsen is an IT Strategy & Governance Consultant and Professor at Maastricht University.
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