22nd March 2012
The finance industry is still suffering from that punishment and the inability of bankers to understand the language of competitors, or even that of parts of their own organisations. This could have been a contributory factor to the global credit crisis.
That's, in part, the thesis of a recent paper for the Bank of England by Robleh D Ali, Andrew G Haldane and Paul Nahai-Williamson. Entitled "Towards a Common Financial Language", it posits that risk management models at Lehman Brothers and others failed because the computer systems in one department did not talk to the machines in another.
Banks don't communicate
While banks invested billions in high frequency trading and other megabyte-hungry applications, and spent similar sums on bonuses, they ignored the need for everyone to have a common computer language. Instead, banks both investment and retail, continue with systems that fail to alert to risks.
Leaving aside the problem of communications between financial firms, many banks had grown by merger and acquisition over the years. It was always easier to bolt on a legacy system to an existing mainframe than to start afresh by ensuring each acquired system was compatible with the firm by spending on it. Equally, information technology has not been as highly regarded as trading or mergers and acquisitions work (or anywhere near as highly remunerated).
Before the financial crisis in 2008, Lehman Brothers was a firm "whose risk management was felt to be close to the frontier of risk management best practices" – a convoluted way of saying the bank took lots of chances. One example was the failure to account properly for a $6bn property exposure so there was "serious misreporting" to the Lehman main board.
From mid 2007, "individual risk limits were breached for fixed income, real estate and high yield business lines, yet in the process of aggregating, something was lost in translation." Firm wide, exposures were within risk. Individual components breached limits.
The difficulty is that the bank was so big and unwieldy that any one part could sink the rest, no matter how healthy. Here three significant divisions were problematic.
These failures, the authors say" were not unique to Lehman. "They were endemic across the financial industry."
The crisis might well have escalated in any case – whatever the quality of systems and "translations". But having common data standards might have prevented – or at least alleviated – the worse.
Other industries manage to run systems on a common basis – HTML for the internet and barcode readers in retailing are just two examples.
Why are there no common standards in finance?
Paul Volcker, the US economist, once said the only useful technological innovation in banking over the past three or so decades was the ATM. The report authors make a lot over how "common languages" have brought success to organisations ranging from WalMart to PayPal, and could reduce the cost of entry for new banks. And it is hard to disagree with their logic.
But they seem to brush aside the reasons why the need obvious elsewhere has not penetrated financial firms.
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