Banks that separate their retail and investment IT operations are not taking a bold enough step to ensure the safe operation of their consumer units in the event of systemic economic problems.
That is according to Sir John Vickers, head of the Independent Commission on Banking, in a major government-commissioned report aimed at bringing more stability to the financial services sector.
The report was widely branded as softer on banks than it could have been, even though it singled out Lloyds Banking Group with heavy pressure to take more action to break itself up. In the report's discussion on IT across banks, it raised ideas to be debated before a final paper is issued in September.
There are suggestions in the industry for banks to have "operational subsidiarisation", an awkward term meaning that the infrastructure needed for a bank to keep operating should be placed in a separate subsidiary from the rest of the group.
The infrastructure to be protected would include IT, data, intellectual property, staff and buildings that are needed for the bank to continue to process transactions, so that if, for example, a bank's investment or mortgage based arm were to go bankrupt, the rest of its operations could continue to function. The idea is to minimise bank bailouts, which are often effected in order to protect consumers.
The report said that the Commission "welcomes the development of operational subsidiarisation as a helpful contribution" to supporting bank stability. But ringfencing entire retail businesses, not just their IT, was more effective and "addresses a number of issues which are not dealt with by operational subsidiarisation alone", it said.
Ringfencing entire retail banking operations would be expensive but was an important step for banks to take, the Commission said. It added that it would "welcome views on alternative ways in which the benefits of a ring-fence could be achieved, including through further development of the operational subsidiarisation idea".
The report supported operational subsidiarisation within other steps to protect banks' retail operations. "Banks should be organised in a way which means that the infrastructure required to support [their] key economic functions can be separated from the rest of the bank in the event of failure," it stated.
Government authorities needed to develop the idea with banks as part of ongoing efforts to protect the system, the report stated. But other steps needed to be taken, including separating financial assets and liabilities between bank units.
"Operational subsidiarisation alone does nothing to address the separability of financial assets and liabilities and significant challenges remain in this area," the report stated.
Having the relevant data from IT systems would help but not solve this issue. "Banks would need to be able to produce the quantity and quality of information required rapidly to value and to separate entire balance sheets," the report stated. "Resolution planning and testing of information systems can help to ensure that the relevant data is available, although significant further investment is needed before these requirements can be adequately met.
"Further, even with perfect information the authorities would be constrained in their ability to separate financial assets and liabilities in practice."
Operational subsidiarisation and a retail ring-fence "should be considered complements", the report concluded, "not alternatives".