In light of recent damaging reports on the banking industry, and the role banks and bankers have played globally in accelerating the credit crisis, London's reputation as a hub for banking needs to be addressed. The financial services industry generates 8.9% of UK GDP, driving job opportunities, growth and business creation around this industry. With this big chunk of our industry having been vilified by recent events and, ultimately, a lack of understanding of what actually goes on in the towers in Canary Wharf or in the City - considered the world's largest financial centre alongside New York - it's time to open the doors and embrace change for a more transparent operation. Banks have a major role to play in London and in maintaining the UK as a major global business and financial services hub. The banks have to remain competitive in the long term, without affecting the overall economy, which is why transparency is so important.
Independent Banking Commissions' recommendations
Progress is already afoot. The Independent Banking Commission last year laid out some recommendations to facilitate the transition from one large (universal) banking conglomerate to a simpler system where retail is ultimately separated from investment banking. This is was termed back to basics banking, isolating the day to day consumer from more risk activities such as proprietary trading. Ring-fencing of retail operations within banks, rather than a full separation, is a gentler solution that will be less likely to damage the banks' competitive nature, yet still protect the taxpayer and the UK economy. Recent government proposals also recommend that changes are made in other areas of the financial market, including investment firms, insurance companies, payments systems and central counterparties. The deadline set for when this has to happen by is 2019, yet many banks are taking the necessary steps to meet it earlier than required.
Impact of Libor
However, further developments in the banking industry are complicating matters and hampering the progress the financial services industry is making in achieving better transparency. Namely the attention over the London Interbank Offered Rate (Libor) which, it is claimed, has been manipulated, refuelling the debate over the banking and financial services sector. Trust is fundamentally at stake. This increased scrutiny on the banking and financial services industry has led to further calls for greater transparency and more control of what goes on in the City and across Canary Wharf. There is even a debate over whether Libor will be scrapped altogether and replaced with an interest rate that is set using actual trades, i.e. transactions made by traders rather than the estimate of the rate at which their banks are borrowing at any given time.
What does this mean for banks?
This would mean a further overhaul of systems, infrastructure and services offered by banks and their associated financial services players in the industry. The Independent Banking Commission's recommendations are already forcing a major 'dis-integration' process which, given that many banks have been following a consolidation path in recent years to drive efficiencies, presents a real headache. Ring-fencing of operations represents a huge technological and process change: IT, including vital, large banking systems in certain areas, will have to be restructured. To deliver this, banks will need to leverage business and IT processes with which they may not be fully familiar with - nor have the skills or scale to be able to address the change without significant disruption to business. It's therefore imperative that banks can turn to a trusted partner to design and implement these massive changes in order that they meet new regulations, but ensuring they do not lose their competitive edge. Technological expertise is not, however, enough; banks need a partner with deep industry expertise who understands their domain and its complexity, including the impact of Libor potentially being replaced. These are challenges unique to the banking industry and both require sector knowledge and experience in managing similar projects. As banks operate in a global environment where country barriers mean very little and debt, risk and credit are shared freely, it is important that the UK's taxpayers are protected from the global nature of competitive banking while retaining London's crown as the capital of banking and financial services. That is where ring-fencing of operations and greater scrutiny come into their own.
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