More reaction to the RBS glitch

After last week's post about the meeting we had at the Club regarding the RBS glitch, I received an email from one attendee, Peter Miller.  Well worth a read so I thought I would post it here as additional input to this challenging and important area in our group.

Last week’s Financial Services Club meeting,
covering the RBS systems failure of last summer, stopped at the point that it
might have got really interesting.  It
ran out of time.

The meeting’s chairman, Ralph Villa, led
with the worthy points that;

• Banks are in business to make
  their customers’ lives both easier and possible, and thus that failure of the
  core systems (note that this is much more than their payment systems) makes
  customers’ lives harder and in some cases impossible.
• He also recognized that reputational
  risk was the key issue for the bank concerned, and that frequent and repeated
  apology, assurance that the bank would rectify the problem and that customers
  would be compensated for the inconvenience were the key things for the bank
  concerned to do loudly and publicly – note that RBS have behaved pretty well in
  this regard.

The real events remain shrouded in mystery and
it was disappointing that Chris Dunne from Vocalink confined his comments to
reporting the correspondence between Stephen Hester and Andrew Tyrie, good
stuff, but old news.  And he added real
but slightly motherhood-and-apple pie wisdom on the problem being caused not
necessarily or exclusively by technology, but by some combination of people,
process (failure or lack of) and technology. 
Too many of his shareholders were in the audience!

The really interesting questions (for me)
were either only briefly touched upon, or avoided.

Would the risk of failure be reduced by the adoption
of new technology core systems by banks in general?

Roy Vella  (ex-RBS) got on his new technology horse.  His simple idea was that modern
object-oriented technology, operating accounts in real time would solve the
problems for any bank.  RBS problems were
caused by a “behemoth” of a banking system, and its operation, largely in batch
mode.  So, the problem was caused and/or
enhanced by the old, creaking and diffuse nature of its technology.

This ignores the fact that some of the many
operations of an accounting system must be – by definition – batch updates (for
example, charges to be applied, interest rate application and indeed the
transmissions to and from Bacs, the highest volume of the clearings).  So, the question goes - would banking systems
themselves be more reliable if they were modern real-time systems?  Would this add to the security, and reliability
of systems and would the absolute requirement for systems to recover to their  point of failure without unsignalled transaction
loss or duplication be thereby enhanced or reduced?  Answers on a postcard, please.

A real problem was highlighted by a comment
from the audience, which was not that old technology is inherently unreliable,
but that the skills and old-fashioned disciplines required to fix, or change
systems were being lost – to old age. 
(Perhaps, we should think about adding courses in Cobol back into the
curriculum?)

But the key problem missed in making the
assertion that new technology solves all problems is that life is as it
is.  If you asked Nick Clegg why good
sound liberal principles seem to have been left at the door by the Lib Dems
going into government, he would answer (and has) that dealing with government
and the economy as it is leads you to different and less than idealistic
solutions than you would like.  Ditto
banks and their technology.

Changing the core accounting system is akin
to rebuilding a house by changing its foundations.  Ask the tower owners in Pisa how easy that
is!  In making a system change, a bank
has to continue to provide service for its customers and meet the demand for
new requirements and regulatory change  -
and yes, test and implement them in a disciplined manner.  (If the only value of the evening were to
remind bank IT operators of the need to embrace good old-fashioned disciplines
then it was worthwhile.)

As an example of core system replacement,
Chris Dunne was asked what the catalyst was for changing the core Bacs system.
(Bacs old technology was replaced by a modern combination of object-oriented,
Oracle-based technology several years ago.) What he was not asked was how this
had changed the functions offered to Bacs clearing members, where the answer
would have been “not very much.”  In
replacing the old technology, the key requirement was that the new system must
exactly replace the old one.  This requirement
is always the key problem – that because of the interconnected nature of a
bank’s systems, the advantage of replacing old with new is limited.  The new must do exactly what the old did,
before you can move on.

The second question related to the interconnectedness
of banks and their systems in the clearings.

What was the effect of the RBS glitsch on the UK
clearings?

The wheels of our economy are greased by
the movement of money between bank accounts across clearing systems – in the
case of the UK, this is mostly CHAPS, Faster Payments, Bacs, the cheque
clearing and LINK.  All of these systems
connect banks to other banks, so the failure of one bank to process,
particularly one of the bigger ones, will tend to bring the movement of money
and thereby the economy as a whole to a grinding halt.  If RBS processes say 20% of market volumes
they are the sending or the receiving bank in 40% of the transactions. The
failure of RBS, Lloyds, Barclays or HSBC payment systems will not only starve
their own customers of service, but will remove some of the liquidity necessary
to make the money move across the clearings. 

It was reasonably obvious that this failure
caused no such disaster.  Why not?  How did other banks help?  What lessons were learned? 

Our clearing systems are essentially
fragile, because they operate as a single interconnected entity of member bank
accounting and payment systems, clearing infrastructures and settlement facilities
offered by the Bank of England.  The
failure of one bank’s systems (and all of the UK banks will hold their hands up
and recognize that RBS systems and operations are no more likely to fail than
their own) causes a systemic problem not just a bank one.

In this case, disaster was avoided – and
one suspects that many hands were called to the emergency pumps to limit any
damage. How was real disaster avoided? 
How could the facilities in the middle of the market be improved to
reduce the risk of failure of one bank’s systems?  Is systemic failure more or less likely as a
result of the RBS glitsch?