Banking land grab exposes data weakness

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A data enhancement and management specialist has warned financial services institutions to strengthen their data analysis capabilities or face increased risk of financial crime and customer defection during the economic crisis.

Datanomic issued its warning as a result of the ongoing consolidation within the industry that has seen a rise in the numbers of mergers and acquisitions (M&A) of distressed businesses. This activity would likely reveal underlying data chaos, it added.

“The pace of restructuring in the global banking market place is unprecedented,” said Dr Jonathan Pell, Datanomic’s chief executive. “Acquiring financial institutions are rapidly inheriting new portfolios, customers and IT systems through stressed mergers, forcing them to gain insight into their underlying data faster than ever before, yet often without the means to do so.”

It is the speed of the land grab amid the market turmoil that will expose data weaknesses as a result of it placing an unprecedented reliance on underlying data. And frenzied M&A activity does not allow adequate time to identify ‘data blind spots’ or consolidate customer records using traditional methods.

The firm said this could lead to weaknesses in capital adequacy calculations, including essential checks such as loan-to-value and loan-to-income ratios, which can no longer be regarded as static.

A reliance on Bank of England, Financial Services Authority (FSA) and Home Office lists that contain the barest minimum of names and fall considerably short of a bank’s legal obligations could also leave them exposed from both a compliance and capital adequacy perspective.

An inability to efficiently consolidate customer records from multiple systems and recognise the value and risk profile of every client could also leave institutions open to an increased risk of customer defection, payment default and fraud.

And, without the ability to conduct a comprehensive data risk audit of the underlying data in their expanded portfolios, organisations could be unable to identify their true picture of risk and liquidity exposure.

“Banks that simply rely on their Basel II systems to give them a reliable capital position will be in for an unpleasant surprise,” added Pell. “Basel II in isolation is simply not good enough. Banks need to proactively identify and reduce all major areas of risk if they wish to avoid making the headlines for all the wrong reasons.”

Datanomic has outlined three core steps to mitigating risk through a data risk audit, which it said takes into account the legal obligations of Basel II, Solvency II, anti-terrorism legislation, single customer view, migration of disparate systems and enhanced capital adequacy.

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