Standards and Central Banks: How Can Soa Support System Stability?

Hans Tesselaar, executive director, BIAN

Banking Technology

Regulations are oftentimes treated with suspicion by banks and other financial institutions. Any restriction on their ability to operate as a business can be seen by the banking industry as an attack on the principals of the free financial market, rather than an attempt to guide it to a more stable equilibrium.
As institutions face up to the real capital implications to meeting new regulations, it can be difficult to convince them or the financial system at large that a particular piece of regulation is, in fact, a positive step. So this begs the question: how can we better communicate to market participants the benefits and value of regulatory changes, whether they are future returns on current capital expenditure or improvements to the structural stability of both financial institutions and the market at large?

One possibility lies in the domain of bank’s technological architecture. Regulations setting forth requirements for banking IT systems could have manifold, and manifest, benefits. To make this clear, however, the case for centralised oversight of the banking sector’s technological eco-system has to be constructed strongly and with transparency. For example, in addition to setting interest rates and controlling money-supply, Central and Federal banks are tasked with the maintenance of the financial system’s stability overall. By overseeing the creation of standardised IT architecture in the sector, these regulators could ensure proper visibility, enabling greater efficiency in maintaining market stability and preventing the strife we have seen with the failures of various IT systems in separate institutions.

Hans Tesselaar

As an added benefit, consider how such a large-scale adoption of an industry-wide infrastructural model would support regulatory updates and overall governance. Central and Federal banks would be able to quickly and easily assess the potential risks and difficulties their member banks may encounter when implementing new regulations. With full visibility of the systems being used by the industry, they would be able to judge how stable each bank’s IT infrastructure is and recommend the best ways to implement improvements. As well as simplifying a regulatory upgrade process, this would have the added effect of levelling the technology playing field and allowing banks to concentrate on competing at a service and product level.

In concrete terms, such a change would entail the implementation of a service-orientated architecture (SOA) in a bank’s IT infrastructure, with each of the system’s unique service domains easily identifiable and performing a defined function. With such an approach, the bank can view each part in isolation when a problem occurs, which enables efficient troubleshooting. The benefits of this approach become obvious when you contrast with the interdependent and messily interwoven current structures of most banks struggling with legacy IT infrastructures, where a weak spot may take hours or days to track through the interplaying and indistinct sections.

The key advantage to a cross eco-system adoption of a uniform architecture is that standards in measurement and messaging are the same across the board. This means that rather than having a different set of instructions and results of analyses from each separate node in the network, each result will be in the same format and easily assessed across the entire system. Whether the overseer is within a single bank and needs visibility into that bank’s processes and IT infrastructure, or whether the overseer is the central bank and needs visibility into the IT capabilities of its member banks, the benefit of adopting SOA is there. Just as a member bank needs to know exactly where its weaknesses are, a central bank needs to know too – a failure in an already unsteady financial eco-system could prove disastrous to the entire construction.

With this in mind, it is suggested that if the banking industry as a whole signed up to a uniform system construction such as SOA, benefits would be felt across the industry. This could lead to a uniformed ‘health map’ used by central banks that will help them to focus and communicate in a standardised form with their member banks. This will simplify the way in which central banks control their members’ IT infrastructure and project portfolios. Far from being a regulatory burden and an irritating expenditure on technology, the infrastructure would save money that would otherwise be spent on frequent IT troubleshooting, and the rules it would impose would greatly improve competition, especially for the larger banks.

Hans Tesselaar, executive director, BIAN

Banking Technology

Regulations are oftentimes treated with suspicion by banks and other financial institutions. Any restriction on their ability to operate as a business can be seen by the banking industry as an attack on the principals of the free financial market, rather than an attempt to guide it to a more stable equilibrium.
As institutions face up to the real capital implications to meeting new regulations, it can be difficult to convince them or the financial system at large that a particular piece of regulation is, in fact, a positive step. So this begs the question: how can we better communicate to market participants the benefits and value of regulatory changes, whether they are future returns on current capital expenditure or improvements to the structural stability of both financial institutions and the market at large?

One possibility lies in the domain of bank’s technological architecture. Regulations setting forth requirements for banking IT systems could have manifold, and manifest, benefits. To make this clear, however, the case for centralised oversight of the banking sector’s technological eco-system has to be constructed strongly and with transparency. For example, in addition to setting interest rates and controlling money-supply, Central and Federal banks are tasked with the maintenance of the financial system’s stability overall. By overseeing the creation of standardised IT architecture in the sector, these regulators could ensure proper visibility, enabling greater efficiency in maintaining market stability and preventing the strife we have seen with the failures of various IT systems in separate institutions.

Hans Tesselaar

As an added benefit, consider how such a large-scale adoption of an industry-wide infrastructural model would support regulatory updates and overall governance. Central and Federal banks would be able to quickly and easily assess the potential risks and difficulties their member banks may encounter when implementing new regulations. With full visibility of the systems being used by the industry, they would be able to judge how stable each bank’s IT infrastructure is and recommend the best ways to implement improvements. As well as simplifying a regulatory upgrade process, this would have the added effect of levelling the technology playing field and allowing banks to concentrate on competing at a service and product level.

In concrete terms, such a change would entail the implementation of a service-orientated architecture (SOA) in a bank’s IT infrastructure, with each of the system’s unique service domains easily identifiable and performing a defined function. With such an approach, the bank can view each part in isolation when a problem occurs, which enables efficient troubleshooting. The benefits of this approach become obvious when you contrast with the interdependent and messily interwoven current structures of most banks struggling with legacy IT infrastructures, where a weak spot may take hours or days to track through the interplaying and indistinct sections.

The key advantage to a cross eco-system adoption of a uniform architecture is that standards in measurement and messaging are the same across the board. This means that rather than having a different set of instructions and results of analyses from each separate node in the network, each result will be in the same format and easily assessed across the entire system. Whether the overseer is within a single bank and needs visibility into that bank’s processes and IT infrastructure, or whether the overseer is the central bank and needs visibility into the IT capabilities of its member banks, the benefit of adopting SOA is there. Just as a member bank needs to know exactly where its weaknesses are, a central bank needs to know too – a failure in an already unsteady financial eco-system could prove disastrous to the entire construction.

With this in mind, it is suggested that if the banking industry as a whole signed up to a uniform system construction such as SOA, benefits would be felt across the industry. This could lead to a uniformed ‘health map’ used by central banks that will help them to focus and communicate in a standardised form with their member banks. This will simplify the way in which central banks control their members’ IT infrastructure and project portfolios. Far from being a regulatory burden and an irritating expenditure on technology, the infrastructure would save money that would otherwise be spent on frequent IT troubleshooting, and the rules it would impose would greatly improve competition, especially for the larger banks.