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Steve Tuck wrote, on 13 Oct 2008

Propping up the house of cards

Dominique Strauss-Kahn, head of the International Monetary Fund (IMF) says that the world financial system is on “the brink of systemic meltdown”; Vince Cable, Liberal Democrat spokesman describes the situation as a “bank tsunami”; the City is talking about a potential banking “armageddon”.  The unprecedented global financial crisis has left us all reeling; where were the regulators when we needed them?

Ken Clarke, former Chancellor of the Exchequer put it quite succinctly on last week’s edition of the BBC’s Question Time: “the regulators were useless and the new regulation system didn’t work,” he said. After years preparing and implementing Basel II, a regulation regime that was supposed to ensure the capital adequacy of financial institutions and reduce risk, we’ve seen bank failure after bank failure as the true state of their liquidity is revealed.

Vince Cable talks about the need for a new regulatory deal with the financial community, but warns that this “should not be done when the public mood is understandably for hanging, drawing and quartering anyone connected with banking… The priority now is disaster management.”  On that front, it’s good to see a broadly united front from governments as they pump money (our money) into the financial system in an attempt to restore confidence and stabilise things. There’s more finger-crossing and touching wood going on than most of us would like, I’m sure; hope is a key part of the strategy as they try to prop up this house of cards.

Banks have traded in increasingly complex financial instruments without a clear understanding of the market and credit risk. They owe it to their shareholders and the public at large (who may, in any case, become significant shareholders whether they like it or not) to take new measures to scientifically assess and mitigate risk.

The data that financial institutions hold should be put under the microscope for forensic analysis.
How many banks, I wonder, rely on incomplete, inconsistent or out-of-date information for their risk assessments? Consider a couple of examples from the retail banking world. A 95%, interest only mortgage a year ago will have turned into a 110% mortgage today. Self-certified or historic income details may have been sufficient to lend money in a time of rapidly rising house prices, but it’s the customer’s current income that matters.

Here are three data-centric suggestions to help financial institutions identify their current risk exposure:
  1. Perform a regular data audit of all key customer information, including calculated fields, to identify errors and anomalies that indicate credit or market risk.
  2. Ensure that KYC (Know Your Customer) checks are rigorously applied and customers are regularly screened against enhanced due-diligence lists to reduce operational and reputational risk.
  3. If you don’t have a single view of your customers, GET ONE NOW. Understanding the complete relationship you have with your customers will allow you to measure your risk exposure in relation to individual entities and enable your marketing department to reduce attrition by targeting customers at risk.
This last point applies to all institutions, but is particularly salient for those institutions involved in a stressed merger.  I’m not talking here about migrating legacy systems or implementing a grandiose Customer Data Integration strategy - those things can happen in due course, but now is not the time to be contemplating your navel about an IT project that might take 2-5 years to complete.  I’m talking about cutting through the political wrangling and technology bigotry and delivering the information that the business needs to survive today. If that’s not clear, call me now!

2 Comments so far.

Sandra P. 13 Oct 2008 wrote:

I don’t think that data quality is the answer to all of the banks’ current woes, Steve, but I’m sure you have a point. I’ve been involved in a number of Basel II data warehouse implementations and they could all have benefitted from having better information going in to them. The clients never saw it as a priority at the time and I’m sure some of them will be rueing that decision now.

Dylan Jones 13 Oct 2008 wrote:

Nice post Steve,

It’s interesting that in a recent interview with DQ expert Tom Redman (www.dataqualitypro.com/tom-redman-interview), he voiced the opinion that Sarbanes Oxley has failed and I have to agree.

I do question how much the credit crunch is down to poor DQ. I think competitive practices and lack of regulatory control from the government are probably bigger issues but I also agree that there needs to be far more transparency and visibility that DQ can afford, as Tom mentions in the same article, banks simply don’t trust each others statements.

I remember 3 years ago a close friend of mine who had been made bankrupt in the past, defaulted on his previous mortgage 5 times and was then granted a self-cert mortgage for x4 times his salary. He’s struggling to keep afloat today.

I remember thinking at the time, this kind of practice is going to have ramifications down the line, and it clearly has. Millions of these mortgages have been sold in a competitive frenzy with companies hedging their bets that the economy would remain stable.

The thing is, the mortgage company knew all about my friends history. They knew he was a bad risk yet they still made that decision because of the market forces. I feel that is the type of situation we need to prevent in the future, DQ can help but if a company flies in the face of it then there is little we can do.

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