By Erik Garr and Rachel Parker, Diamond Management & Technology Consultants
When the Federal Deposit Insurance Corp. recently asked the banks it regulates to provide information on how they are using billions of dollars in government aid to help struggling homeowners avoid foreclosure, it underscored the critical role technology will play in transparency issues and reporting. After the difficulties many institutions experienced with the Sarbanes-Oxley Act (SOX) earlier in the decade, a new and more robust regulatory environment is making a lot of senior bank executives cringe. Here we go again.But while it will indeed be a challenging situation once again, banks-especially those participating in the Troubled Asset Relief Program (TARP)-should be laying the foundation for an efficient response to the slew of forthcoming rules. In response to SOX, too many banks were hasty in their responses, and their approaches were overly reactive. As a result, these banks painted themselves into a corner by piling up costs, launching hundreds of SOX-related projects, and adding vast, unwanted bureaucracies. We saw the effects firsthand as we helped many of these banks survey the damage and remedy the situation.
Technology will serve as the backbone of a response to TARP requirements, especially when banks answer to new government and taxpayer shareholders. For banks receiving TARP money, systems and infrastructure will play critical roles in key areas: operating models, policies and procedures, and reporting requirements. It is crucial that banks develop technology infrastructures that allow access to information to provide the transparency and accountability required by relevant business areas and regulatory bodies.
Predicting precisely how a new administration and Congress will address the financial crisis is difficult over the long term, but the early returns are instructive. Banks that participate in TARP will be subject to a range of new reporting requirements that go above and beyond the existing regulatory requirements-combining the needs of the SEC, the Federal Reserve, and the Office of the Comptroller of the Currency. But with new regulations and uncertainty come added burdens, and building a competitive advantage will require having insight into the infrastructure (systems and data) required to get ahead of regulatory pressures and minimize the millions of dollars required for compliance through careful planning and investment-rather than issuing knee-jerk responses to each new change in regulations.
U.S. banks can borrow from the lessons of others. European banks have been managing a more active regulatory environment for some time, and have successfully used SWAT-team-like functions to meet this challenge. For instance, Barclays PLC created a nimble central organization to actively manage new regulations and to act as the single point of contact between all business units and critical group functions. However, it first needed the technology infrastructure in place to meet these goals.
Banks can also learn from other regulated industries. The pharmaceutical industry faced HIPAA regulations that created companywide requirements beyond customary FDA drug trial regulations. As a result, companies that had a sound technology roadmap in place before requirements piled up were in far better shape than firms scrambling for patchwork solutions. Many pharmaceutical companies appointed chief compliance officers who report directly to the CEO. Further, the compliance office shifted from a reporting function to an important source of input on company strategy, with an influential seat at the highest level of management.
In short, TARP appears to be only the beginning, and a new regulatory environment will evolve over time. Technology planning that originates from a central office within an organization will help the IT department keep a watchful eye on upcoming changes and manage a coordinated response-instead of being stuck in a reactive mode.
Erik Garr is a partner in Chicago-based Diamond Management & Technology Consultants' public sector practice. Rachel Parker is a partner in Diamond's financial services practice.