Blog | In the News

»  Weblog Main   |   »  View Entries By Topic   |   »  View Entries By Date

Obama Criticizes Bank Bonuses Again

Posted on February 10, 2010

In a blog entitled, "Clearing Up the Bonuses Issue," posted on the White House website, the Administration shares President Obama's latest comments on banker bonuses, which are anything but clear. In a recent Bloomberg interview due to air Friday, the President straddled a line between outrage at how much large bank CEOs such as Jamie Dimon and Lloyd Blankfein make and support for free markets and capitalism. This is consistent with speeches he has made over the past year (at least, according to excerpts from earlier speeches provided by the White House).

The White House quotes the President as saying, “I, like most of the American people, don't begrudge people success or wealth. That's part of the free market system. I do think that the compensation packages that we've seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.”

Asked about the $17 million that Jamie Dimon, CEO of JPMorgan Chase, received for 2009, the President is said to have replied, “Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don't get to the World Series either. So I'm shocked by that as well. I guess the main principle we want to promote is a simple principle of 'say on pay,' that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs' success and ultimately will make the performance of American businesses better.”

Dimon's $17 million includes no cash, it's all in restricted stock units and options. The bank has also said that shareholders will vote on his and other JPMorgan executives' compensation at the next annual meeting. So precisely what the President is "shocked" about is not readily apparent. Perhaps when the entire interview comes out, a clearer answer will emerge.

Comments

Does the Goldman/AIG Mess Prove Volcker's Right?

Posted on February 08, 2010

Kudos to Gretchen Morgenson and Louise Story of the New York Times for their article in yesterday's paper casting light on one aspect of Goldman Sachs' role in the financial crisis.

It's already widely believed that Goldman's aggressive collateral calls on AIG, which was insuring much of Goldman's mortgage-backed debt securities against default, helped bring the insurance giant down, depleting it of cash to meet its other obligations.

Yesterday's article provides some insight into Goldman's process of creating subprime mortgage-backed securities and buying protection against them from AIG, while expecting the housing market would tank and that AIG would have to pay enormous sums to Goldman (and also, while aggressively selling similar collateralized debt obligations to customers). Traders structured a number of deals called Abacas specifically to enable Goldman to benefit from the housing collapse. When AIG was bailed out, it had $5.5 billion worth of these Goldman deals on its books.

In August of 2008, after AIG had been pushed to pay $19.7 billion in collateral to trading partners in these deals, the insurance company tried to cancel the contracts that were draining it of cash. Goldman refused, and at the same time its equity research department published a negative report on AIG, saying it was in a "downward spiral which is more likely to ensue as more actual cash losses emanate" from the unit insuring subprime-backed securities. AIG shares fell 6% that day and the government bailed it out shortly thereafter, paying Goldman in full for all its contracts.

Reviewing this episode, one can see the validity of the points former Federal Reserve Chairman Paul Volcker has been making lately, that speculative trading activity should not be intermingled with the banking system nor eligible for government bailout money, and that more oversight should be applied to the capital markets and insurance industries. Although the Volcker Rule doesn't apply to Wall Street and insurance companies, had Volcker been a guiding force in Washington in 2008 and his principles executed, presumably Goldman would not have received its quickie bank charter and neither Goldman nor AIG would have received bailout money, they would have been allowed to fall in the death spiral they created for themselves, or simply suffer losses and recover, and none of this would have impacted the traditional banking industry. It's possible that the U.S. financial system and our economy would be better off today.

Comments

Volcker Explains His Bank Reform Rules

Posted on February 01, 2010

Paul Volcker, a former chairman of the Federal Reserve and chairman of the president’s Economic Recovery Advisory Board, and the person credited with President Obama's recent "Volcker Rule" preventing banks from proprietary trading and investing in hedge funds and private equity, detailed his thoughts on bank reform on the New York Times' Op-Ed page yesterday.

He spoke of the "moral hazard" of the efforts of central banks and governments to rescue large failing and potentially failing financial institutions.

The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.

He described commercial banks as "integral to a well-functioning private financial system. It is those institutions, after all, that manage and protect the basic payments systems upon which we all depend."

But he notes that Adam Smith more than 200 years ago advocated keeping banks small. "Then an individual failure would not be so destructive for the economy," he writes. However, "that approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required."

When banks own or sponsor hedge funds and private equity funds, and when they conduct proprietary trading, Volcker says, they place bank capital "at risk in the search of speculative profit rather than in response to customer needs." He notes that only four or five U.S. banks do this.

In Volcker's ideal world, no capital markets firm would ever be deemed “too big to fail.” "What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail," he says.

Volker, like many other thought leaders, mentions the need for countries to work together on financial regulation. "What is essential now is that we work with other nations hosting large financial markets to reach a broad consensus on an outline for the needed structural reforms, certainly including those that the president has recently set out," he says. "My clear sense is that relevant international and foreign authorities are prepared to engage in that effort. In the process, significant points of operational detail will need to be resolved, including clarifying the range of trading activity appropriate for commercial banks in support of customer relationships."

Comments

Deutsche Bank CEO Calls for Global Banking Rules at Davos

Posted on January 29, 2010

Josef Ackerman, CEO of Deutsche Bank, told CNBC's Maria Bartiromo his views on recent bank regulation proposals at the World Economic Forum in Davos yesterday. "We're in a global market, we need global rules," Ackerman said, suggesting that President Obama's recent proposal to separate banks from the capital markets might not work if only one country adopts it. Ackerman supports the Basel II capital allocation requirements, but feels the Volcker rule could reduce liquidity and efficiency in the global markets.

Comments

TGIF: Daily Show on the Obama vs. Bankers Showdown

Obama wants to shrink banks, but bankers can take dividends hostage, Jon Stewart points out.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Obama Takes On Bankers
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

Comments

IWeek: Apple Tablet Should Be Well-Received By Businesses

Posted on January 27, 2010

Apple's new Kindle-like tablet should be suitable for executives such as bankers, according to Fritz Nelson, Editorial Director for InformationWeek (a sibling publication to Bank Systems & Technology).

"Companies are taking a serious look at NetBooks, especially for frequent travelers who already have enough to lug around without the laptops and accessories that make them look like they're headed to a summit climb," Nelson writes in his blog. "Smartphones, as powerful as they are, usually don't cut it for people away from the office for more than a day."

He points to the success of Apple's iPhone, which the tablet is said to be loosely based on. iPhones are used in 70% of Fortune 100 companies and 50% of the Financial Times 100, according to Apple. Nelson notes that if all applications for the new tablet come through the Apple-vetted iTunes store (as they do for the iPhone), the risk of bugs and security issues will be reduced.

Elements the device will need to be successful, Nelson points out, include a good battery strategy, natural user input mechanisms, carrier partners that can handle fat applications and provide multimedia bandwidth and a partner ecosystem.

Apple is expected to unveil its tablet at a press conference at 1:00 EST this afternoon.

Comments

Beware of Unintended Consequences to the Volcker Rule

Posted on January 26, 2010

Although President Obama's "Volcker Rule" — his proposal that banks forego proprietary trading, investment or ownership in hedge funds and private equity firms and not be allowed to become too big to fail — could take three to five years to move through Congress and become implemented, if some version of it does get passed, it could have a profound impact on banks, said Matt Cohn, partner and leader of Capco's banking group, in an interview this week.

Cohn believes there is a need for regulatory reform to address the issues of too big to fail, as he describes it, "the implicit guarantee that some members of the industry get the benefit and revenue when the economy is doing well, but then when the risks are too excessive then they can put it back on the government." But the challenge is addressing the root cause, excessive risk taking and reward for institutions and individuals, without enacting rules that lead to unintended consequences.

"The big concern I have is that you're addressing some of the problems after the fact with new rules and regulations that may have a substantial set of ramifications on the health of the economy as it turns around," he says. "Washington has to strike a fine balance between regulatory reform that protects against moral hazard and also not bashing the banks to the extent that they can't support and promote the growth of the economy, housing recovery and job growth."

Definitions will be critical to complying with this set of rules, Cohn says. For instance, some banks, such as JPMorgan Chase, have a "passive" or "partial" ownership in hedge funds — will they be required to sell them off or could they simply change their legal status? "I don't think there's any clarity right now about what that means to those types of businesses," Cohn says. Lawyers will delve into these issues first.

But there will undoubtedly be a technology impact on banks if the Volcker rules get enacted, Cohn says. One effect will be increased regulatory reporting and transparency requirements, particularly around proprietary trading so that banks can demonstrate that they're in compliance, he says. "Banks will have to adjust, from an operational and a risk perspective, how they're processing transactions on a day-to-day basis, and/or how they're ultimately reporting against those and communicating that up," Cohn says.

Comments

Goldman, Morgan Stanley May Drop Bank Status, NYT Reports

Posted on January 25, 2010

Goldman Sachs and Morgan Stanley, which became bank holding companies in September 2008 to gain government protection and access to the Fed's discount window, may now shed their bank status if the 'Volcker Rule' preventing banks from proprietary trading goes through, according to an article in Saturday's New York Times.

"President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds," the article noted. "The plan, policy makers said on Friday, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations. But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses."

Goldman would be the biggest beneficiary of such a move because it makes huge profits from proprietary trading and runs many private equity and hedge funds, the article noted.

It would be less attractive to Morgan Stanley, which has raised deposits and reduced trading operations since the crisis.

The article quotes Simon Johnson, a former chief economist at the International Monetary Fund, as suggesting that these two firms are so large and interconnected that even if they broke free of bank status, their collapse would imperil the global financial system. “You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail,” Mr. Johnson said.

Comments

Banks Send Aid to Haiti

Posted on January 15, 2010

Say what you will about banks' role in the financial crisis and recession, one good quality of the U.S. banking industry is that it's usually the first to respond to catastrophe with money and aid.

Dow Jones' Financial News Online today reports that several banks have already pitched in to help victims of the earthquake that hit Haiti on Tuesday:

Citibank has pledged $2 million for relief and recovery efforts; $250,000 will go to the American Red Cross, the rest to reconstruction projects. Supplies were sent to Haiti yesterday.

JPMorgan Chase has committed $1 million, a quarter of which will go to the American Red Cross and CARE to help set up temporary shelters and other immediate relief. The bank will also match up to $250,000 of employee donations.

Morgan Stanley has also set aside $1 million that will go to the American Red Cross's Haiti relief fund, in addition to its normal $250,000 donation to the Red Cross.

Bank of America Merrill Lynch is giving $1 million, half to the American Red Cross's relief fund, the other half toward other recovery and reconstruction efforts.

If your bank is helping the Haitian people in some way, please let us know so we can share the news; you can write to pcrosman@techweb.com.

Comments

Top Bankers Tell Financial Crisis Commission They're Not to Blame

Posted on January 13, 2010

This morning, the leaders of four large banks — Lloyd Blankfein, chairman and CEO of Goldman Sachs; Jamie Dimon, chairman and CEO of J.P. Morgan Chase; John Mack, chairman of Morgan Stanley; and Bank of America's new CEO Brian Moynihan — are testifying before the Financial Crisis Inquiry Commission, a group that will spend this year investigating what caused the financial crisis of 2007-2009 and produce a report in December.

Although there weren't many surprises in the bankers' testimony, Dimon, Mack and Moynihan conceded banks had a role in the financial crisis, just not their banks. Blankfein's remarks didn't reflect any sense of responsibility.

In his opening comments, commission chairman Phil Angelides compared his group's work to that of the 9/11 Commission, which conducted over 1,200 interviews, reviewed 2.5 million pages of documents and held 12 days of public hearings. "We should be similarly thorough," Angelides said.

Blankfein, the first to testify, said that Goldman stayed out of mortgage lending and prudently managed risk. He chalked up the crisis to the growth of foreign capital, ten years of low long-term interest rates and "the official policy of promoting, supporting and subsidizing homeownership in the U.S."

Dimon, next up, addressed the issue more directly. "To be sure, there are a number of things we could have done better: the underwriting standards in our mortgage business, for example, should have been higher, and we wish we had done an even better job in managing our leveraged lending and mortgage-backed securities exposures," he said. His view on the underlying causes of the crisis: "the creation and ultimately the bursting of the housing bubble; excessive leverage that pervaded the system; the dramatic growth of structural risks and the unanticipated damage they could cause; regulatory lapses and mistakes; the pro-cyclical nature of policies, actions and events; and the impact of huge trade and financing imbalances on interest rates, consumption and speculation."

Morgan Stanley's Mack also expressed a bit of contrition. "In retrospect, many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment," he told the commission. "The financial crisis has also made it clear that regulators simply didn't have the visibility, tools or authority to protect the stability of the financial system as a whole."

Moynihan, the last to speak, gave a thorough analysis of many causes of the financial crisis, including the mortgage fiasco —mortgages made to people with poor credit histories, with small down payments, adjustable rate mortgages that would reset to higher rates, low-documentation loans and an overreliance on mortgage brokers that were given incentives to "get the borrower through" and then sell the loans. He reviewed the CDO and SIV issues that arose in the capital markets, as well as the role of credit default swaps and mark-to-market accounting. Moynihan's statement, which can be found on the FCIC website, would be useful reading for any student of the financial crisis.

P.S. One banker who wrote in to critique this blog said, "I am not sure how anyone seriously covering this financial crisis can exclude the continuing role of Fannie Mae, Freddie Mac and Congress’s failure to provide greater oversight over the government guaranteed agencies when there were many indications of fraud, and the systemic risk posed by separating risk and reward."

Comments

Charles Barkley Opens A Bank (On Saturday Night Live)

Posted on January 11, 2010

As the first host of Saturday Night Live in 2010, one thing retired basketball player Charles Barkley did was announce the opening of his new bank, Barkley's Bank. "Give me your money, and I'll either double it or lose it all," he said.

Comments

Job Losses the Worst in 34 Years

Posted on December 05, 2008

To me, it's the single scariest development of many lately: November saw the biggest monthly job loss in 34 years, extrapolating from statistics released today by the Department of Labor.

More than 500,000 jobs, net, were lost in November, a sign of deepening recession, commentators say. And that's not counting those who have been unemployed so long they are no longer counted in the statistics of those seeking work.

The unemployment rate now stands at 6.7 percent, a 15-year high.

Comments

What Can Banks Learn from the Xerox Turnaround Story?

Posted on November 18, 2008

If there ever was a time when a turnaround story would resonate in the banking industry, it’s now. So I attended the presentation by Anne M. Mulcahy, chairman and CEO, Xerox Corp., on the opening day of the 2008 BAI Retail Delivery Conference & Expo in Orlando, eager to learn more about how this organization overcame financial, operational and competitive failures to transform itself and regain market dominance.

And Mulcahy offered very compelling and interesting insights into the Xerox turnaround, observing, “The best turnarounds never end. We’re in a constant state of improvement.”
In some ways, the situation Xerox found itself in roughly 10 years ago is similar to the current financial services crisis, in that it resulted from a “perfect storm” of factors -– a weak economy, stronger competition, and internal turmoil. Mulcahy detailed how, upon being named president and COO, she led an effort to halt Xerox’s decline by renewing bonds with both customers and employees, improving liquidity (mainly through divesting of non-core assets), reducing costs, and “investing in technology to create customer value.”
One of the toughest decisions, Mulcahy recalled, was to “stay the course on research and development. We invest a billion-and-a-half in R&D every year.” In fact, she said, even though “R&D is the easiest place to take costs out of, there was no real choice. There was no victory in saving for the short term and trading off the future.” Ultimately, Xerox decided to do both, and “we are benefitting today from the power of that investment.”
Another point made by Mulcahy that is relevant to the challenges banks are facing today was that “The pace of change doesn’t allow you to fix companies in phases. You have to walk and chew gum at the same time.” Similarly, she reflected, “There is no question that crisis is a powerful motivator. It enables you to do things you had to do all along.” The cost cutting and reduction of waste that was undertaken when Xerox was struggling “was the kind of thinking and restructuring we should have been doing all along,” she said.
This relates to another “lesson learned” from the Xerox turnaround. “Use the good times to change,” Mulcahy advised. “That’s precisely the time organizations can tolerate change, and when you have to time to devote to strategy.”
It was too bad that Mulcahy didn’t take question from the BAI RD audience, because it would have been interesting to get her perspective on the current turmoil in financial services. As compelling as the Xerox turnaround story is, it seemed almost idealistic or quaint to think that the principles outlined by Mulcahy are enough to save many of the institutions that are at the brink today.
One has only to think about Citi’s CEO Vikram Pandit announcement earlier in the week that more than 50,000 jobs would be eliminated at the bank in an effort to reduce headcount and expenses by 20 percent -– part of an ongoing effort to make Citi more competitive and profitable. Is it really a turnaround strategy, built on the strengths of the organization’s culture and fulfilling compacts with both customers and employees -– cornerstones of the Xerox turnaround -– or a scramble that trades off the future?
Ultimately, Xerox, under Mulcahy’s leadership, was able to control its own destiny. A growing number of banks may not have that luxury in the current financial, regulatory and political environment.

Comments

"Experts" Weigh In on Economy

Posted on October 10, 2008

Sometimes a little calm, rational commentary can help put something like the financial crisis into perspective. Here's what some "experts" had to say on the issue...

Comments

Taking the First Steps: G30 Report Sets Stage for Financial Regulatory Reforms

Posted on October 06, 2008

On a day when the Dow Jones Dow Jones industrial average fell below 9,600 (before recovering somewhat before the close), its lowest level in more than five years, the Group of Thirty issued a report that analyzes the current challenges facing the global financial system and offers information that may help guide future banking regulation reforms.

The report, “The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace,” was issued by the Washington, D.C.-based Group of Thirty, an international body composed of central bank governors, economists and private financial sector experts, on the eve of the meeting of G7 finance ministers and central bank governors in Washington.
The officials who presented the report in New York took pains to emphasize that this report is the first step in what will be a wide-scale effort to address the needs for regulatory and supervisory reform that have been demonstrated so dramatically in recent weeks. “We hope this will help frame the debate about modernizing the [regulatory system],” said Jacob A. Frenkel, chairman of the Group of Thirty, Vice Chairman of AIG, and former Governor of the Bank of Israel at a press conference on Monday, Oct. 6.
According to Paul Volcker, chairman of the G30’s Board of Trustees, and former chairman of the Federal Reserve Board, the study (which was launched last year although it “germinated several years ago”) was intended primarily to review existing regulatory structures, rather than make any specific proposals for reform. “It was conceived as Part One of our work in this area,” he said. In the meantime, however, “It was quite obvious that the earth has moved” since the study was launched, Volcker acknowledged. “The large investment banking organizations have disappeared before our eyes as we were writing this report.” And while the report declines to make specific recommendations, he added, “there’s no doubt that the [current] system of regulation and supervision needs to be revised,” not only in the U.S. but in other global markets, as well.
The G30 report concluded there are four approaches to financial supervision currently employed across the globe, and describes them as institutional (where a firm’s legal status determines which regulator is tasked with overseeing its activity); functional (supervisory oversight is determined by the business that is being transacted by the entity without regard to its legal status); integrated (a single universal regulator conducts both safety and soundness oversight as well as conduct-of-business regulation for all the sectors of financial services business); and “twin peaks” (there is a separation of regulatory functions between two regulators -– one that performs the safety and soundness supervision function and the other that focuses on conduct of business regulation). The U.S. structure is described in the report as functional with institutional aspects; last year’s U.S. Treasury Blueprint advocates a modified Twin Peaks approach as a long-term goal.
“None of these structures by itself proved to be optimal,” pointed out Roger W. Ferguson, Jr., president and CEO of TIAA-CREF, former vice chairman of the Fed and vice chairman of the G30 Regulatory Systems Working Group. But as far as what works or is important going forward, Ferguson said, one key is a “transparent deposit protection scheme.” The report also showed “the value and necessity of communication and coordination” among regulatory and supervisory bodies and the central banks. “If [we] see weaknesses in the linkages, the chances of mishap increase,” Ferguson said.
Among the questions left unanswered by the report, according to Ferguson, are how much power central banks actually should have, how to deal with unregulated institutions, and what form international cooperation should take going forward.
The reference to Treasury Secretary Paulson’s “blueprint” proposals of last year spurred an observation relating to the fact that until recently (at least in the U.S.) calls for regulatory reform probably had more to do with providing competitive advantage to financial institutions than with the transparency and accountability that are the priorities now. Volcker noted that in the name of competitive advantage and flexibility, “a lot of activities were taken one way or another” – especially as financial institutions exploited the market for credit alternatives. “Now everyone’s running back to mother -– commercial banks,” Volcker said. “It’s an interesting phenomenon.”
Volcker also emphasized that as important as regulation and supervision are to the health of the financial markets, they are “not the whole show. Don’t count on it to solve all crises. We can improve [regulation and supervision], but when we look at the [current] crisis, a lot of things went wrong, [including] inside financial institutions and the structure of finance.”

Comments

Sibos Themes: Openness, Hope … and Anxiety

Posted on September 17, 2008

During a week when commentators seriously debated whether or not the United States financial services industry could survive, conversations I had at Sibos tended to be, if not optimistic, at least somewhat hopeful about some of the less-publicized trends in banking.

There seemed to be consensus that while the industry faces some very tough times, the institutions that survive should emerge stronger, more focused, more customer-oriented, and structurally better equipped to deal with change and challenge. For once, this is largely because of the contributions information technology is making to the business (rather than IT somehow being at fault for the problems).
One theme that emerged is that of openness. That’s not new, but it was interesting how many Sibos participants talked about standards, collaboration, partnerships and transparency. To some extent that’s in anticipation of future regulatory requirements, but it’s also turning out to be good business. More big banks are developing open account capabilities in trade, and also seeking more ways to expose information about payments and transactions that their clients can use to better manage liquidity and risk. Vendors that once swore blood oaths against each other are increasingly coming together to work on industry standards and frameworks. “Vendors are talking about interoperability because customers are demanding it,” noted Brian Jackson, technology strategy for banking, worldwide financial services, Microsoft.
But it’s certainly not a time to feel smug. The credit crisis and its consequences is not a failure of IT, but with IT playing a key role in the banking industry’s recovery, the pressure certainly will be on technology organizations and their leaders to deliver. “What can they do to help the business manage during a crisis?” asked Mark Bubar, worldwide VP sales, financial services, CA. Governance will be key, and CIOs must be able to report on project status and performance accurately and increasingly in real time, he said.
Accordingly, Sibos exhibitors seemed cautiously optimistic that, even in these tough times, there will be investment in technologies and systems that help banks improve risk management, governance, processing efficiency. Intellectually it makes sense that of course financial institutions will make these kinds of investments. But with bankers already feeling that market forces are beyond their control (according to research that SAP releasedjust prior to Sibos), it’s not at all clear whether management will have the courage to commit these kinds of resources in the face of unimaginable media and political scrutiny.

Comments

Stormy Weather at Sibos and Across Financial Services

Posted on September 16, 2008

The raw, rainy weather in Vienna serves as a metaphor for the bleak feelings of many attendees at this year’s Sibos payments conference, which is taking place during what is commonly being called a meltdown, crisis, or, as Martin Wolf, chief economics editor of the Financial Times, described it when he kicked off Monday’s opening session, “an extraordinary moment in financial history.”

Seizing the weather metaphor, William Rhodes, senior vice chairman at Citi, contended that the industry is in “the eye of a storm.” Referring to the extreme leverage many firms took on, and the real estate bubble, he said, “We were living in a Goldilocks economy. Now there is dislocation in the credit markets worldwide, we’re in the worst housing downturn since the Great Depression, there’s a lack of confidence between and among financial institutions.” Other factors were “lapses in regulatory oversight and corporate governance.”
According to Willem Buiter, a professor at the London School of Economics, policy makers are responsible for “half the problem, but financial institutions are at least as guilty” since they chased the questionable business and vanishing spreads. Speaking of regulation, Buiter said, “’Soft touch’ regulation regulated names rather than risks. Some of the changes that are necessary can only be effectively done at the global level.”
As if the audience wasn’t anxious enough, Buiter predicted, “The next crisis will be even more interesting than the current one. We haven’t seen the hurricane. We could be in for a long and persistent recession in the North Atlantic area, and the U.S. hasn’t been in a recession yet.”
Based on the comments of the panelists, the FT’s Wolf observed, “So the answer to the question,’ Is the worst over?’ is a resounding, ‘No.’” In terms of lessons learned, David Hodgkinson, group chief operating officer, HSBC, remarked, “When you’re in a hole, stop digging, but that’s not enough.” The industry has to be much more proactive about risk and addressing dangerous practices, he said. In terms of risk, he added, “exposures need to be looked at holistically,” also stressing the necessity of “building the independence of the risk function and building management understanding or risk. It should report to the CEO and have access to the board.
While defending the concept of securitization as “vital to the future of our industry,” Hodgkinson also said there is “a need to return to simpler, more transparent instruments.”
Ultimately, the LSE’s Buiter said, “There is a real governance problem in financial institutions. It’s more acute in finance because finance is inherently unstable. [Institutions] trade in trust and promises.” Furthermore, since “governments will not let large financial institutions go broke, it means there must be more wide-ranging regulation –- uniform regulation for all highly leveraged financial institutions.” As far as regulators’ current actions, Buiter noted, “The amount of moral hazard that has been created is staggering.”
In terms of lessons that have been learned –- or should be learned –- from the current troubles, Citi’s Rhodes provided a long list: “I hope we finally get international accounting standards and international regulatory norms that are adhered to. Basel II has to be looked at again. Securitization has to be done in a prudent, transparent way. There has to be an understanding between regulators and those they regulate on these issues.
“But,” Rhodes added, “ I don’t want to see innovation killed.” But innovation must take place “in a proper, prudent, transparent way. That’s essential for a financial system.”
Responding to the panelists’ emphasis on management knowledge and insight, the FT’s Wolf suggested (I think only half jokingly), “There should be on one in management under 50! It would be so helpful if there were bankers who were around in the 1920s” –- the last time in modern history that the very existence of the world’s financial system was questionable.
It’s an appealing concept –- if only repairing the financial system was as simple as having senior citizen greeters at Walmart.

Comments

A Historic Day in Financial Services

Posted on September 15, 2008

Good morning from Vienna –- I’m here to attend the Sibos payments conference, which opens this morning (Monday, Sept. 15).

I have a full day of appointments scheduled with exhibitors (technology companies and banks) that want to talk about their new solutions geared to making the payments process more efficient and secure. But the buzz on the floor today no doubt is going to be about the news that greeted me when I woke up this morning – that Lehman Brothers plans to file for Chapter 11 bankruptcy protection, that Bank of America plans to acquire Merrill Lynch, and that struggling insurance giant AIG plans to restructure. It’s certainly possible that the headlines may change by the time the markets open in New York, but clearly today is going to be a huge day in the history of financial services.
But, you know, payments, shmayments. The big news of the day, as far as I am concerned, is that Chicago Cubs pitcher Carlos Zambrano threw a no-hitter against the hated Houston Astros last night (in Milwaukee, where the game was moved after Hurricane Ike shut down the Astros’ stadium). Go Cubbies!

Comments

Why It Matters: Citi Hires Lippert as CIO with Mandate for Transformation

Posted on July 07, 2008

The story behind the story of the operational crisis and ongoing reorganization at Citi is one of technology.

On the one hand, Citi has a history of being an aggressive technology innovator, pioneering emerging technologies and channels such as ATMs, online and mobile ahead of the banking pack. On the other hand, banking history also is littered with numerous failed, diverted or abandoned Citi technology initiatives. Banking insiders often point to Citi’s technology organization and its performance as a classic example of the adage that big is not always better -– that budgets and scale do not necessarily guarantee success in IT. A mix of bureaucracy, politics, egos, “not-invented-here” mentality and bad timing often has scuttled promising initiatives, or at very least made it difficult for IT fully enable evolving business strategies.
So the July 3 announcement that Citi has named Marty Lippert Citi chief information officer and corporate operations and technology chief operating officer is very interesting and could optimistically be interpreted as a sign that the New York-based banking giant knows it needs to do something extremely dramatic -– both operationally and symbolically –- about its IT organization. Lippert comes to Citi from Royal Bank of Canada, where he was vice chairman and group head of global technology and operations. According to the Citi announcement of Lippert’s hiring, he will “play a critical role in driving transformational change across Citi's newly centralized Global Technology and Operations divisions, working closely with Kevin Kessinger, Citi chief operations and technology officer.” Lippert, who will join the Citi Senior Leadership Committee, also will oversee Citi's Corporate Shared Services and Real Estate Operations.
Lippert has long been recognized as one of banking’s most-effective and forward-looking technology executives, and in 2004 was recognized by Bank Systems & Technology as one of The Technology Elite most-innovative CIOs in banking. RBC has a great reputation in terms of its use of technology, and so Citi’s hiring of Lippert has to be viewed as a real coup.
Of course, now the real work begins, and the challenge is huge. In the Citi announcement, CEO Vikram Pandit said: "Marty's appointment emphasizes the importance we place on technology in driving enterprise transformation, and we'll look to him to be a key architect of that change. This role is central to Citi's commitment to operational excellence and cost management, and we are excited to have Marty on board to help orchestrate what we believe will be one of the great turnarounds in US corporate history."
If Marty Lippert meets even a portion of the expectations Citi -– and the bank technology community -– have for him, he will be widely praised as a visionary hero who has accomplished great feats. Here’s wishing him the best of luck, because I don’t want to even think about the alternatives.

Comments

IBM and Grameen Team Up to Expand Microfinancing

Posted on November 05, 2007

Banks are always talking about how important it is for them to find new markets in order to grow. The unbanked and underbanked have been making headlines for months as financial institutions try to develop strategies to lure this group into using banks for their finance needs. However, another possible avenue to take might be in the microfinancing area.

Microfinance, also known as "banking for the poor," helps disadvantaged entrepreneurs start or expand small, self-sustaining businesses. Loans provided by local microfinance institutions (MFIs) are usually unsecured and range between $US100 to $US300 in value. As each loan is repaid, the money is recycled as another loan, multiplying the value of each dollar in the fight to defeat poverty. This type of financial service is primarily seen in developing markets, such as Africa, India and Latin America.

Last month, IBM announced it is planning a partnership with the Grameen Foundation, a nonprofit based in Washington, D.C., whose goal is to help the poor attain financial stability through microfinance, technology and innovation. The companies feel there is a need to bring more technology to the microlenders of the world so that they can broaden the services they offer customers. The companies will expand Grameen's open source microfinance software platform, Mifos, to help lenders manage client data, process loans and track payments more efficiently. The goal is to enable microlenders to handle even more accounts using the souped up software, in a similar manner to software used by commercial banks, claims IBM.

This sounds like a worthy endeavor. The firms claim that there is a need for more robust, flexible microfinance solutions in the market. Most microfinancers still use paper and pencil or simple spreadsheets to manage their accounts. But maybe this is enough for them, given the relatively low value of the loans. Then again, the Microcredit Summit Campaign, a global umbrella organization for MFIs, estimates that as of 2006, more than 3,100 MFIs were providing microfinance services to more than 113 million poor people around the world. In addition, the MFIs listed on the Microfinance Information eXchange (MIX) reported more than $23 billion in gross loan portfolio between 2004 and 2006.

Not too shabby. This is certainly refreshing to hear after all the bad press about how "evil" lenders are for allegedly victimizing people who know they shouldn't be getting loans in the first place!

Comments

Mortgage Crisis Dominates the Headlines

Posted on October 30, 2007

While Maria Bruno Britz takes a much needed vacation in Hawaii this week — no, I'm not at all jealous — I’m taking over her newsletter duties.

The predominant banking news this week has focused on the effects of the mortgage crisis. Yesterday I wrote a blog about a new bill that Congress has proposed to institute reforms in the subprime mortgage industry.

But, every day, more and more news comes out. Here’s just a sampling of headlines that have already appeared this week:

° Vultures Eying Mortgage Corpse.

° Mortgage Industry Facing More Troubles.

° O'Neal Out As Merrill Reels From Loss.

° Mortgage Crisis Creates Heartbreak, Opportunities.

° Tackling the Mortgage Crisis.

Like BS&T said in our October issue, this mess is not the fault of IT.

But that doesn't mean that it's not IT's responsibility to help get financial institutions out of this mess. or help them avoid it in the future. Those technology companies that seize the opportunity and jump on the hysteria created by the current situation will benefit. Solutions that focus on data and analytics to gain more transparency about mortgage and credit risk should gain popularity as financial institutions look for ways to safeguard themselves against future losses, say many experts. I would love to see more vendors jumping on this opportunity to promote their products.

Comments

Congress Moves to Reform Mortgage Industry

Posted on October 29, 2007

Congress introduced legislation on Oct. 22 to combat abuses in the mortgage lending market and "to provide basic protections to mortgage consumers and investors."

H.R. 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, is a response to the current subprime mortgage crisis, according to the legislators who introduced the bill.

The proposed legislation aims to:
-Establish a federal duty of care, prohibit steering and call for licensing and registration of mortgage originators.
-Set a minimum standard for all mortgages that state that borrowers must have a reasonable ability to repay.
-Attaches limited liability to the secondary market securitizers who package and sell interest in home mortgage loans outside of these standards.

In testimony before the House Committee on Financial services on October 24, Federal Reserve Gov. Randall S. Kroszner said, "In recent years, the subprime market has grown dramatically because of advances in credit scoring and underwriting technology, which enables lenders to charge different borrowers different prices on the basis of calculated creditworthiness. These loans are recognized by the higher prices they carry, which reflect subprime lenders' decisions to seek additional compensation for the credit risk they incur. … While the expansion of the subprime mortgage market over the past decade has increased access to credit, the subprime mortgage market during recent years was also accompanied by a deterioration in underwriting standards. In some cases, abusive or fraudulent lending practices resulted in homeowners taking on mortgage obligations they could not afford, with terms they may not have fully understood. Delinquencies and foreclosures have increased. During the past two years, serious delinquencies among subprime adjustable-rate mortgages (ARMs) have increased dramatically, reaching nearly 16 percent in August, roughly triple the recent low in mid-2005."

But not everyone supports all aspects of the bill.

"If H.R. 3915 becomes law, some people will be locked out of the mortgage market, many of whom would have been successful homeowners," said the Mortgage Bankers Association's Kurt Pfotenhauer, SVP in testimony during the bill's hearing. "The question for this committee is whether the protections that this bill provides are worth that price."

This will be an interesting bill to keep an eye on. While the associations that represent bankers and brokers seem to support the idea of a mortgage reform bill, they all object to the bill's specifics, citing regulatory burden as a prohibitory factor in having more Americans become homeowners. What will be the technology implications of reform? Will any vendors anticipate changes and modify their technology to aid compliance for banks? Will the bill have any negative effects on mortgage technology vendors?

We will have to wait a while for answers to most of these questions, as nothing moves fast in Congress.

Comments

Mississippi Bank's Disaster Recovery Plan Stepped Up With New Technology Center

Posted on September 10, 2007

While FEMA is no better prepared for a major hurricane today than it was when Katrina struck in September 2005, one bank has taken it upon itself to be prepared for future crises.

On the second anniversary of Hurricane Katrina, Gulfport, Miss.-based Hancock Bank dedicated a new state-of-the-art technology center. The 37,390-square foot self-sustaining center safeguards Hancock's critical operations.

Hancock learned its lesson the hard way during Katrina, when it’s former technology center was destroyed. The bank has poured $16 million and nine months into building this new center. More importantly, it moved it 10 miles inland and built eight-inch thick reinforced concrete exterior walls. The building can now withstand winds of more than 200 mph, the bank says.

Following Katrina, many of the affected banks’ efforts to get up and running were hampered by the fact that their back-up sites were located too close to their primary locations. As a result, the FFIEC recommended that banks reevaluate their backup site locations.

Prior to Katrina, banks were required to have disaster recovery plans in place, but as we witnessed, many of these plans were merely documents that didn’t transfer into realistic strategies during the crisis. It’s good to see a bank setting an example. While a robust, self sufficient data center is only one part of a complete post-Katrina disaster recovery plan, it’s a huge step that banks, both inside and outside of the Katrina affected areas, should be pursuing.

With the new technology center, Hancock seems to have taken steps to ensure that it will be prepared for the next disaster when it arrives. Other emergency features include:

• A high-tech command center for monitoring storms with real-time national and international reports.

• Two cooling units, an 8,000-gallon chilled water tank, and a redundant continuous-flow pump system that regulate ideal temperatures for a computer room and network operations center resting on 5,400 square feet of raised flooring.

• A back-up system comprising 120 continuously monitored 20-year batteries generating 360 kilowatts of power and a three-phase, continuously online solid-state uninterruptible power system (UPS) operate in conjunction with the building's standard electrical system to ensure constant conditioned power for critical systems if commercial utilities fail.

• A doubled-lined 25,000-gallon tank equipped with a continuous recycler and emergency alarm fuels dual 820-kilowatt stand-by generators designed for automatic operation during power failures lasting almost a month.

Comments

NACHA Issues Ruling On International ACH Transmission Format

Posted on August 16, 2007

By Maria Bruno-Britz, Bank Systems & Technology

The world of payments just got a tad less confusing, thanks to NACHA, the Herdon, Va.-based payments organization. Effective March 20, 2009, all international payments made via the ACH Network will be identified as International ACH Transactions using a new Standard Entry Class (SEC) Code—IAT. The new rule will also require that IAT payments include specific data elements defined by the Bank Secrecy Act’s (BSA) Travel Rule.

According to NACHA, there are international ACH payments that receiving depository financial institutions cannot identify. Many payments initiated internationally enter the U.S. ACH Network through correspondent banking relationships. As a result, a number of international payments are formatted as domestic transactions, making it difficult for depository financial institutions to identify these transactions to comply with U.S. law.

The new rule will identify International ACH Transactions (IATs) by focusing on where the financial agency that handles the payment transaction is located. As such, certain transactions currently formatted as domestic transactions, but are international transactions, will be sent as IATs.

NACHA says the new ruling will help banks comply with BSA regulations since the new ACH standard requires more specific documentation to accompany each payment, per the BSA Travel Rule. This data include, Originator name, address, account number; Originator’s depository institution name and payment amount; Receiver name, address, account number; and the Receiver’s financial institution). As a result, depository institutions should find it easier to comply with OFAC guidance.

Furthermore, NACHA says as a side benefit to the rule banks will be able to distinguish between consumer and business ACH transactions. The amendment will also make the U.S. ACH Network formats more consistent with other network formats, such as wire transfer formats, that currently carry the “Travel Rule” information to comply with BSA. The change is also consistent with the field lengths in SWIFT formats to ensure efficient mapping of data.

Comments

BRIEF: Refinski and Fortney Promoted at Metavante

Posted on August 14, 2007

Executive VP Gary A. Refinski was named chief information officer of Milwaukee-based Metavante. He will be responsible for operations and service delivery, technical support, technology infrastructure and corporate systems. Also, SVP Dave Fortney was named chief technology officer of the company. He will report to Refinski and will provide leadership for Metavante’s technology direction and also lead the Technology Committee.

BRIEF: Purzycki Named Barclay’s US Card COO

Joe Purzycki was appointed chief operating officer for Barclay’s U.S. credit card business (Wilmington, Del.). Purzycki is responsible for all operational aspects of the business, including customer support, collections and technology.As the COO, Purzycki will lead efforts to drive bank-wide efficiency, innovate with new technologies, improve the customer experience and provide foundational
support for Barclays growth.

BRIEF: Hexaware, Pemtrad In Risk Management Venture

Posted on August 10, 2007

IT services provider Hexaware Technologies (Mumbai) and Pemtrad International will launch Risk Technology International (RiskTech). The new entity will focus exclusively on offering a comprehensive suite of technology-intensive solutions in the domain of enterprise risk and compliance management, primarily for financial institutions worldwide. RiskTech will have offices in U.K., U.S. and India.

Comments

Basel II Agreement Reached, Basel IA Dropped

Posted on July 30, 2007

By Nancy Feig

The federal banking regulators on July 20 finally reached an agreement regarding the implementation of Basel II in the United States. The agreement will lead to the finalization of a rule implementing the advanced approaches for computing large, international banks' risk-based capital requirements.

According to a joint release from the agencies, including the Federal Reserve, FDIC, OTS and OTC, the agreement retains the transitional floor periods of the most recent notice for proposed rulemaking and is fairly consistent with most already-in-place international approaches. After a parallel run in 2008, the transition floors provide for maximum cumulative reduction of 5 percent in the first year, 10 percent in the second year, and 15 percent in the third year.

While the final rule will only directly apply to the largest 11 U.S. banks, the rule's reverberations will be felt throughout the banking industry.

The regulators dropped Basel IA, which many non-core banks clung to as a potential life raft to stay competitively afloat. But the regulators quickly ensured the nation's smaller banks that a standardized approach for all non-core banks would be made available before the first transition period begins for the core banks on before the first transitional period in 2009.

This again brings up the argument that smaller banks would be left at a competitive disadvantage to the larger banks that will now be allowed to hold much less capital in their reserves and be able to free up that money for other purposes. Community bankers seem hesitant to acknowledge that dropping Basel IA is a good move. In a statement, ICBA said, "ICBA has expressed its concern about the impact of Basel II on the domestic competitive landscape, and we look forward to reviewing the proposed rule regarding a standardized option for non-core banks under Basel II to replace the earlier Basel IA option."

It seems as if they are expecting another battle ahead.

And according to a July 23 article in American Banker, John Reich, director of the Office of Thrift Supervision, is anticipating some backlash. He attempted tried to preempt any opposition by promising that all banks will be on a level playing field. According to the paper, Reich vowed to "make certain that nothing we have agreed to here today results in any competitive disadvantages."

From what I’m reading, it appears that the specifics of Basel IA were too complicated and that a standardized approach, like the ones available in other countries, may be the best way to keep non-core banks on a level playing field with the largest U.S. banks and large, international banks based outside of the U.S.

I do know that Basel IA was something in which many small banks had a vested interest. While the regulators and the lobbyists have had their say about last week's news, I would be interested in hearing some reaction from the non-core banks about the death of Basel IA and how they are preparing their institutions for the standardized rule that is yet to come.

It took eight years for the agencies to finally agree on a Basel II rule, I find it difficult to believe they will agree on a standardized approach by sometime next year.

Comments

BRIEF: First Horizon On Track with New Chief Credit Officer

Posted on July 26, 2007

John O’Connor, chief credit officer of First Horizon National (Memphis, Tenn.) for 18 years, is nearing retirement age and is transitioning chief credit officer duties to Greg Olivier, who has worked for the company since December 2003. O’Connor will continue full-time until at least the end of the year and will remain in a consulting role until May 2008.

BRIEF: Hypercom CEO Keiper to Step Down, March Named to Board

William Keiper, CEO of payments solutions provider Hypercom (Phoenix), is stepping down as CEO of the company and will be resign as a member of the board of directors effective Aug. 15, 2007. Philippe Tartavull, president of Hypercom, was promoted to chief operating officer effective immediately. Ian Marsh, EVP and managing director, Asia Pacific Region of the Western Union Company, was appointed a member of the board. Until a new CEO is found, the Hypercom will be directed by an interim office of the chairman comprised of Daniel Diethelm, chairman, Philippe Tartavull, president and COO, and Thomas Liguori, CFO.

Coinstar Beefs Up Its Remittance Business with GFC Buy

By Maria Bruno-Britz, Bank Systems & Technology

Anyone who thought Coinstar was just a company that provided nifty change counters at the supermarket should think again. The company, which also offers such services at its kiosks as DVD rentals and gift cards, has made an acquisition that further strengthens its presence in the international remittance market.

The Bellevue, Wash.-based company announced it will purchase GroupEx Financial Corporation (GFC; La Mirada, Calif.), an independent provider of electronic money transfer services between the U.S. and Latin America. GFC operates a network with approximately 1,650 send agents in 23 states servicing 13 countries. Once the deal meets regulatory approval, the Coinstar Money Transfer (CMT) service will be offered at more than 31,000 agent locations in 143 countries.

It seems like everyone, including banks, wants a piece of the remittance market these days, an area that has traditionally been dominated by the likes of Western Union and MoneyGram. The GFC purchase is not Coinstar’s first foray into the remittance space—it acquired Travelex Money Transfer in 2006. According to Marci Maule, public relations director for Coinstar, "The acquisition of GroupEx ... is a complementary, tuck-in to our existing money transfer business, providing us with more than 1,600 agents in the U.S. and a strong U.S. to Latin America business corridor. Last year, we acquired Travelex Money Transfer, which has now become Coinstar Money Transfer."

The move not only signifies the growing importance of the foreign worker market for Coinstar, but it will also give Western Union and MoneyGram a run for their money. According to comments by Aite Group research director Gwenn Bézard, “With Travelex Money Transfer and now GroupEx’s acquisition, Coinstar has been building volumes to become a credible alternative for supermarket chains—a space historically dominated by Western Union and MoneyGram. The combination of Coinstar’s network of kiosks and POS devices in retail locations and the volumes of GroupEx make Coinstar a serious competitor for the two leading money transmitters.”

The international remittance market is pegged at a value of over $369 billion and is estimated to grow to $465 billion by 2010, according to Aite Group. With figures like this, there’s no doubt this area is poised for some significant growth in the coming years. Anyone who can capitalize on it in a novel way that appeals to this often bank-adverse consumer segment will reap the rewards.

Makes me wonder how Wal-Mart will respond to this too…

Comments

BRIEF: Sants Named Chief of UK’s FSA

Posted on July 19, 2007

By Maria Bruno-Britz, Bank Systems & Technologyy

Hector Sants was appointed chief executive of the Financial Services Authority (FSA) as of July 20, 2007. Sants succeeds John Tiner, who will step down at the Annual Public Meeting on July 19.

Comments

BRIEF: People’s United Secures Itself with Vasco Solution

By Maria Bruno-Britz, Bank Systems & Technology

People’s United Bank (Bridgeport, Conn.) will use Zurich-based security solutions provider Vasco’s Digipass GO3 and VACMAN Controller to protect their high-value transactions. The Digipass-secured applications include ACH, Wire Transfer, Information Reporting, Internal Transfers and Stop Payments Applications.

Comments

BRIEF: Capital Markets Cooperative and Fannie Enter Alliance

By Maria Bruno-Britz, Bank Systems & Technology
Capital Markets Cooperative (CMC; Ponte Vedra Beach, Fla.), a provider of risk mitigation solutions to mortgage bankers, entered alliance with Fannie Mae (Washington, D.C.) that will help members of CMC when selling loans to the secondary market. CMC members will now enjoy access to Fannie Mae's Desktop Underwriter platform, in addition to benefits such as advantageous pricing, increased flexibility in methods of execution and a variety of loan products and value-added services.

Comments

BRIEF: SunTrust Picks Reveleus for Basel

By Maria Bruno-Britz, Bank Systems & Technology

Atlanta-based SunTrust Banks will use i-flex’s (Redwood Shores, Calif.) Reveleus Basel II Solution. The solution will span all activities of the bank including consumer, commercial, mortgage, private clients and capital markets.

Comments

Treasury’s Commonsense Turn-around on Anti-money Laundering

Posted on June 25, 2007

By Maria Bruno-Britz

Last week, it was revealed that Treasury Secretary Henry Paulson is going to push for a more balanced approach to anti-money laundering compliance for smaller financial institutions. A document released by the Treasury Department states that not all financial services providers are subject to the same kinds and degree of risk. Therefore, matching risk-based examination to risk-based obligations should become the norm as smaller FIs and money service bureaus (MSBs) seek to comply with Bank Secrecy Act (BSA) regulations going forward.

The move has been applauded by the financial services industry, from the Independent Community Bankers of America (ICBA) to the American Bankers Association. “[The] announcement is a welcome initiative in reducing the disproportional regulatory burden facing community banks while still safeguarding our nation’s security,” said Karen Thomas, executive vice president and director of Government Relations of the ICBA, in a statement.

According to Aite Group analyst Eva Weber, “This is good news… Small banks have struggled to find adequate human and technology resources to address compliance issues, and the evolution of the BSA to address money laundering has only made that struggle worse. Treasury Secretary Paulson’s reference to a commonsense approach is exactly what the industry has been asking for.”

Weber does caution, however, that the industry may not see any of the proposed changes for another year, so small banks and money service bureaus will have to continue to “scrape by” for a little while more.

There’s no doubt that the financial services industry is a very regulated one. We do live in a world where both the opportunities and risks are great. Therefore, it is important to safeguard how and with whom banks conduct their business as much as possible. However, it is always prudent to do so with an eye on the ability of those affected by a given regulation to follow through. It’s the same balancing act that is found in the security space—some transactions are more high risk than others and require an additional step of authentication beyond user name and password. So too in the AML space—although it is vital to keep track of transactions, not all transactions are as risky as others and not all institutions are as prone to high risk transactions as others. As long as Treasury’s new position on AML tracking manages to maintain a high degree of integrity at all levels, the industry can only stand to benefit from the changes. Resource allocation is important to all organizations—especially the smallest ones. However, to draw yet another parallel to the security space, will money launderers perceive small banks as an easier target once the reduced AML requirements are introduced? After all, once security it tightened in one channel or geographic region, criminals always seek out the next weakest link to continue their dirty business.

Comments

Wal-Mart Takes a Backdoor Into Banking with Prepaid Cards

Posted on June 08, 2007

By Maria Bruno-Britz

Just when you thought it was safe to be a bank, here comes Wal-Mart yet again.

After its failed effort to obtain an industrial loan corporation license, the retail giant, showing its usual tenacity, seems to have taken a different tactic in the financial services space—going after the underbanked and unbanked with a prepaid card. These are people with little, if any, relationship with a financial institution. There are millions of these people in this country (the estimates vary according to who you ask). Due to their sheer numbers, banks realize the enormous market potential of this untapped segment of the population. However, penetrating the psyche of this market is easier said than done, and banks are also realizing this fact.

People refuse to deal with a bank for a variety of reasons. This market consists of many Americans, not just recent or undocumented immigrants. To them, a bank is to be approached with caution. Instead, the underbanked usually gravitate toward retailers with trusted brands, like Wal-Mart. Perhaps they better understand what a merchant does and feel they know them better because they may shop there frequently. Wal-Mart knows this and is smart to capitalize on it with its announced prepaid card. This is a virtual captive audience for Wal-Mart. The company figures if it can’t get into banking by traditional means, why not take a more circuitous route—and perhaps throw a monkey wrench into any plans by financial institutions to expand their reach in the underserved community.

Prepaid cards are growing in popularity, according to experts. These are also the perfect payments instrument by which a financial services provider (regardless of the fact that it is a bank) can offer services to the underbanked. These are virtual accounts, sometimes with the logo of a major credit card network behind them, that give the underbanked a sense of empowerment and financial independence in many cases that they previously lacked by visiting the local check cashing outlet.

Contending with the Western Unions of the world is tough enough for banks that wish to capture a share of the global remittance market. Now they have to deal with Wal-Mart on the prepaid card side of things. Banks will need to become even more creative in their approach to the underbanked market going forward. It’s not a segment that every bank can handle, of course, given the risk involved and the marketing effort they must expend to get the attention of this population. Many financial institutions actually do have successful programs with this market segment. However, there are millions of these untapped customers out there and now they might become even more entrenched with the Wal-Mart brand.

Wal-Mart’s efforts in this space should be watched closely. It probably comes as no surprise to the industry that the retailer is expanding its financial services offerings to a prepaid card. It was only a matter of time.

Comments

U.S. Bancorp’s Pam Joseph Gives Advice on Going International

Posted on June 01, 2007

By Maria Bruno-Britz

Pamela Joseph, vice chairman at U.S. Bancorp and chairman & CEO of the bank’s payments subsidiary NOVA Information Systems, was a featured speaker at this year’s TowerGroup Financial Services Business & Technology Conference. Joseph’s presentation covered NOVA’s strategy for going international and at the same time provided attendees with some good advice for doing so.

According to Joseph, NOVA is the only part of U.S. Bancorp that has an international presence. Before being acquired by the bank in 2001, NOVA began to realize just how much smaller the world was becoming. “We had clients with orders coming in from around the world,” she said. “That’s when we realized we had to change. Based on our customers’ international reach, we had to push out globally.”

NOVA’s business model involves creating partnerships with banks in other countries in order to gain a foothold there. It provides about 4,000 banks with its payments services using proprietary software. Everything NOVA does is electronic, Joseph noted. She says this is especially important in the rapidly changing European payments market with the advent of the single euro payments area (SEPA).

It’s first venture into the international space was with Bank of Ireland. The deal allowed NOVA to help the bank expand its presence beyond the Emerald Isle. Through a joint venture with BofI, euroConex, a top five European payment processor and processor of dynamic currency conversion, was founded.

It’s never easy to become a global organization, but there are a few things to keep in mind as a company develops a strategy for doing so, Joseph reminded attendees. Among her suggestion for a financial services firm that wishes to go international:

• Don’t be afraid to ask for outside help.
• Look for countries with currency stability and a stable political environment.
• It helps if an American company enters another English-speaking country.
• Start where the infrastructure exists.
• Start with a low-risk business.
• Seek out strategic partners who are local.
• Always have a local tax accountant on hand.
• Understand the legal challenges of the other country.
• Understand worker dynamics: language, culture, and work ethic. Joseph noted, for example, that NOVA’s European operations will never be quite as productive as they are in the U.S. due to different work schedules in European countries.
• The way you do things in the U.S. may not work elsewhere.

Comments

Open Solutions’ Waggoner Passes Away

Posted on May 18, 2007

By Maria Bruno-Britz

Cliff Waggoner, co-founder and chief architect of data processing solutions provider Open Solutions (Glastonbury, Conn.), passed away May 11 after a battle with cancer. He was 66.

Waggoner co-founded Open Solutions in a basement in 1992 hoping to bring relationship-based technology to the financial services industry. His background included more than 30 years of information system and design experience that covered a wide range of technology and application development areas. His design expertise became the foundation for the Open Solutions data model.

“We are all deeply saddened by the loss of Cliff Waggoner, a true pioneer and inspiration for our company and the industry,” said Louis Hernandez, Jr., chairman and CEO of Open Solutions, in a statement. “Cliff was a private, humble, yet accomplished man who was admired by all those who knew him. He was a true visionary who dreamed of using technology to create more personalized interactive relationships for the financial services industry through the use of innovative systems and open architecture.”

Comments

Greensburg State Bank Shows Banking Industry’s Determination In the Face of Disaster

By Maria Bruno-Britz

Here’s a neat little come-back story. Greensburg State Bank, a small financial institution based in Greensburg, Kan., lost its only building to an F5 tornado that slammed through the area earlier this month. The twister wrought a trail of devastation throughout the town, leaving many without their homes, businesses and even their lives.

As in any disaster, one of the first thoughts to cross people’s minds is money. Even if your home is intact, who knows what the coming days and weeks might hold in terms of emergency needs? Proving once again the resiliency of the U.S. banking system, Greensburg State Bank was open for business only days later (under a tent). The bank apparently used Fiserv to outsource many of its services and with the vendor’s help, was able to offer customers--the residents of battered Greensburg--some kind of financial normalcy.

I think this situation illustrates once again the importance of technology today to our banking system. Many bankers will say technology is not a bank’s core business, but everything they do sure is dependent on IT. Banking and IT are so intertwined in today’s world that it truly is disturbing to think what might happen during a massive disruption to the financial system--something that would make the confusion that occurred post 9-11 look like hiccups. Sure, systems can go down (especially when you lose your only physical location!), but once they’re brought back online, the bank can provide its customers with the financial services they need to get their lives back on track.

I’m sure there are dozens of similar stories out there about other banks that have bounced back from disastrous circumstances. Just think back to Hurricane Katrina. Not only do such cases demonstrate the vital role of technology in banking, but they’re also a testament to the people who work at these banks and their technology partners’ ability to align with their needs as well.

Comments

Citi to Buy Bisys for $800 Mn

Posted on May 04, 2007

By Maria Bruno-Britz

New York-based Citi plans to purchase outsourced services provider The Bisys Group (New York) for approximately $800 million. The financial services firm plans to retain the Investment Services Division of Bisys, which includes the Fund Services and Alternative Investment Services businesses in order to beef up its own position in the hedge and mutual fund services area. Once the deal closes, Citi will sell the Retirement and Insurance Services division of Bisys to affiliates of investment advisor J.C. Flowers & Co. (New York).

“In addition to demonstrating Citi’s continued commitment to investing in high-growth areas of our business, this acquisition enhances our fund of fund and mutual fund servicing capabilities while establishing Citi as a leading provider of private equity fund services,” said Tom Maheras, co-president of Citi Markets & Banking, in a statement. “Citi is committed to integrating this new operation into a world class, scaleable business and enhancing our innovative service offering to new and existing Citi clients.”

The transaction is expected to close in the second half of this year and is subject to Bisys shareholder approval and to regulatory approvals in the United States, Ireland and Bermuda.

Comments

Williams to Serve as New BITS President

By Maria Bruno-Britz

Leigh Williams was selected to serve as president of BITS, the business strategy and technology division of The Financial Services Roundtable, the Washington-based financial services public policy group. Williams will replace founding BITS CEO, Catherine Allen, who announced in January that she would step down from her CEO role, effective May 1.

Williams comes to BITS from the Kennedy School of Government at Harvard University, where he served as a Senior Fellow in the Mossavar-Rahmani Center for Business and Government. While at Harvard, his research focused on public and private sector collaboration in the governance of privacy and security. Prior to joining the Kennedy School, Williams worked at Fidelity Investments in various risk management, security and privacy roles, including Chief Risk Officer and Chief Privacy Officer. His most recent position at Fidelity was Senior Vice President, Public Policy.

“Leigh Williams provides exceptional talent to this significant leadership role. He will build on BITS’ outstanding legacy of accomplishments and is perfectly suited to serve our members, the industry and the nation in the pivotal role of BITS President,” said Steve Bartlett, president and CEO of The Financial Services Roundtable, in a statement.

Comments

SOA Standards

Posted on April 23, 2007

SAP and banking community definition group unite the banking industry around enterprise SOA standards

SAP AG (Walldorf, Germany) announced that members of the industry value network (IVN) for banks, which brings together SAP, banks and non-banks to collaboratively develop solutions for the banking industry, have formed an expanded definition group to co-innovate and create global standards for enterprise service-oriented architecture (SOA).

The expansion of the community enables the members to leverage the results from the IVN for their custom projects as well as to directly influence the development of software solutions for the banking industry. As part of expanding the scope of its charter, the community has opened its membership to include additional banks and non-banks, including software providers, service providers and auditors.

The community definition group for banking currently has 37 members with more than 130 individual participants engaged in 23 work groups defining services, discussing architecture topics and creating building blocks to help companies make a successful transition to enterprise SOA. In addition, the community has created an SOA taxonomy, developed a service landscape and identified the strategic and organization building blocks that banks require for a successful transition to enterprise SOA.

Participants engaged in the expanded community include, among others: Callatay & Wouters, Commerzbank, CSC, Deloitte Consulting, FinanzIT, Hewlett Packard, HSH Nordbank, La Caixa, PricewaterhouseCoopers AG Wirtschaftsprufungsgesellschaft, SPSS, StreamServe, Syskoplan AG, SWIFT and TXS Financial Products.

Recognizing that it is paramount to have customers and suppliers agree upon specific services definitions, SAP and a group of nine leading banking customers launched this initiative in December 2005. Participants included ABN AMRO, Absa, Banco Bilbao Vizcaya Argentaria (BBVA), Credit Suisse, Deutsche Postbank, ING, Intesa Sanpaolo, Nordea and Standard Bank. Since the commencement, the group has met significant milestones and has jointly identified more than 180 critical enterprise services, which SAP and other partners have committed to implement.

Participants Find Significant Benefits

ING joined the industry value network for banks because its management believes that a standardized environment can significantly reduce IT costs for banks.

"Integration issues make the business case for buying software, especially in larger organizations," said Johan Smessaert, head of enterprise architecture, ING. "Collaboration in defining services via the industry value network for banks should help reduce integration and new solution adoption costs. With its strong experience in standardizing solution development, SAP uses these services definitions to reduce customer integration costs. SAP can also take an active role to promote ecosystem collaboration on a common services layer for the banking industry."

Standard Bank, the largest bank in South Africa, also saw cost reduction as a major motivation in seeking an enterprise SOA. Being a part of the industry value network for banks has also helped Standard Bank learn from other banks regarding the benchmarks for enterprise SOA adoption, and exchange ideas to avoid common pitfalls.

"We recognized the momentum of SAP NetWeaver as a business process platform for other industries and saw the opportunity to join first movers in the banking industry to define an open core banking platform based on enterprise SOA," said Herman Singh, director of architecture and technology engineering, Standard Bank. "The expanded community lets thought leaders collaborate openly to define common services and leverage SAP and its ecosystem of solution vendors to codify and commoditize the processes at the industry level."

SWIFT is a worldwide community of financial institutions whose purpose is to be the leader in communications solutions enabling interoperability between its members, their market infrastructures and their end-user communities. SWIFT joined the community definition group to contribute in the development of standardized services.

"I believe SAP's community definition group could be of significant strategic relevance to the banking industry," said Johan Kestens, head of marketing, member of the executive committee, SWIFT. "The energy and enthusiasm are high, the approach is practical and capitalizes on the momentum of the industry. As a leading global infrastructure of the financial industry, SWIFT can contribute on standard definition, processes and community implementation. I am looking forward to working with the members to try and achieve this."

Comments

John “Jack” Henry, Founder Jack Henry & Assocs., Dies

Posted on April 16, 2007

By Maria Bruno-Britz

Jack Henry & Associates (Monett, Mo.) founder John W. “Jack” Henry passed away of natural causes this weekend at the age of 71.

“Jack,” as he was known, was one of the early pioneers in community bank software. In 1976 after the bank in which he worked as the data processing manager was acquired and his position was eliminated, Jack, along with business partner Jerry Hall, started Jack Henry & Associates. Henry and Jerry ran the company from a space rented in a small engine repair shop in Purdy, Mo., and started with a handful of community banks as customers. Today, the company provides software and services to more than 8,700 financial institutions and employs more than 3,500 employees nationwide.
Although he was no longer involved in the day-to-day operations of the company, Henry maintained an office on the Jack Henry & Associates corporate campus, and served was acting vice chairman and senior vice president.
Jerry Hall, executive vice president and co-founder of Jack Henry & Associates, commented, “Jack leaves a strong legacy for the businesses and people he touched. He believed in bringing people together and forging lasting relationships. Those relationships and the impact he had survive him and are a testament to all that he has accomplished. He did something that few people could--brought together people who could step in behind him and carry his vision forward.”
Henry is survived by his wife Brenda; his daughter Vicki Jo Henry; his son Michael Henry; one stepson Gary Williams, four grandchildren and two step grandchildren.

Comments

Sovereign Bank’s Eco-friendly EBPP Push

Posted on April 13, 2007

By Maria Bruno-Britz, Bank Systems & Technology

Some banks are getting a bit creative in their efforts to make customers go electronic. Sovereign Bank (Wyomissing, Pa.), along with partner CheckFree (Atlanta), will donate $1 to The National Arbor Day Foundation for each new electronic bill that customers activate at Sovereign Bank from April 1 through May 31. Each donation will help cover the cost of planting one new tree.

Through the Go Paperless campaign, consumers can sign up with participating billers to receive e-bills at the Sovereign Bank website or at any of its branches in the Northeast.
Kevin Sander, director of corporate partnerships with The National Arbor Day Foundation, puts things into perspective: “It takes 24 trees to produce one ton of virgin printing and office paper,” he said in a statement. “Obviously, businesses and consumers won’t ever stop needing paper, but technology is helping make an impact to reduce unnecessary paper usage and waste. Electronic bill payment is a key element in that quest, and we commend CheckFree and Sovereign Bank for their commitment to helping conserve our natural resources.”
Electronic bill payment and presentment appears to be gaining more appeal among consumers, according to a study conducted by Harris Interactive and sponsored by CheckFree. The 2007 Consumer Bill Payment Survey showed that 52 percent of e-bill users agreed that receiving bills in electronic form helps the environment by saving paper and energy. Thirty-nine percent of consumers receiving e-bills at bank websites said they no longer receive a mailed copy of that bill.
“People today are much more environmentally aware than ever, and are looking for ways--no matter how big or small--to do their part, from recycling to buying a hybrid car. Sovereign, together with our technology partner CheckFree, hopes that consumers will take the ‘Go Paperless’ challenge and start paying and receiving bills online as a way of doing their part to improve the environment,” said Marshall Soura, managing director of the Global Solutions Group, Sovereign Bank.
The initiative certainly has wide-spread appeal on several levels. Of course, there’s the conservationist argument for electronic bill payment and presentment (EBPP) in that it does save trees to a degree. Plus, the $1 donation will help replenish the nation’s forests. But not to be forgotten in all the earth-friendly speak is the fact that EBPP can save money—for consumers, billers and banks. The U.S. Postal Service may not necessarily like the idea of fewer pieces of mail in the system, but the fact remains that not having to mail bills and payments will save people money. And paying bills online will reduce check volumes.
Even more important is that EBPP is a definite security play. A body of research has grown around the idea that e-bills are far safer than the paper kind. People are less likely to fall victim to fraudsters who engage in the old “dumpster diving” technique where they rummage through trashcans for discarded bills. This method has long been and continues to be one of the chief contributing factors to identity theft, even in our electronified world.
As for the initiative by Sovereign Bank, it will be interesting to see how many of its customers decide to convert to EBPP.

Comments

Banks are Most Talked-about Financial Services Category Among Consumers

Posted on March 23, 2007

By Maria Bruno-Britz, Bank Systems & Technology

Banks are certainly giving people something to talk about these days, at least that’s the conclusion of a study conducted by Keller Fay.

According to the market research firm’s TalkTrack survey, people talk about banks more than twice as much as any other financial service category. Whether this talk turns into positive results for banks isn’t always the case, however.

TalkTrack monitored word of mouth (WOM) conversations of over 6,000 respondents aged 18 and older. The results, published in the report “Opportunity Missed? TalkTrack Insights on Word of Mouth About Banks,” illustrated that on a typical day, 35 percent of Americans have word of mouth conversations about financial services products or brands. Further, banks accounted for 44 percent of all financial brand-specific word of mouth, a much greater share of WOM than financial conglomerates (18 percent), investment firms (14 percent), general “stock talk” (10 percent) and credit cards (8 percent). However, 36 percent of these bank conversations contained no recommendation, and only 26 percent contained a strong recommendation to buy or try the brand, 11 points lower than for other consumer categories.

According to Keller, the research also suggests that banks could generate even more effective word of mouth by improving customers’ experience; encouraging loyal customers to make recommendations; and applying a creative, targeted approach in their use of marketing and media, which has an important role to play in consumer word of mouth.

What this all might mean for banks is that although they are definitely top of mind among consumers, these same people don’t appear to be compelled to push a particular brand or make product recommendations. This could have implications for the manner in which banks develop their marketing and loyalty campaigns.

What about blogs or social networking sites? With all the hype around Web 2.0-type technologies, Keller Fay maintains that over 90 percent of WOM conversations actually occur through low-tech channels—over the phone or in person. Perhaps this is an indication that people today view their banks as more a part of their everyday lives and not as something “special” to be discussed in a specified, formal manner. That’s not necessarily a bad thing because it shows just how ingrained and embedded banking has become in our daily or weekly routines. Maybe simple is better in the case of getting customers to evangelize about their respective banks. Of course, banks should employ all channels in their marketing efforts and dig into their customer data stores to get a better profile of who their customers are, both existing and prospective ones. Banks know this, but perhaps setting up a virtual presence in Second Life isn’t necessarily the way to go in this case. Then again, maybe it is if people start to view banks as part of their everyday “virtual” lives.

Incidentally, the survey found that Bank of America received the most word of mouth among all banking brands with a 17 percent share, followed by JP Morgan Chase (9 percent), Citibank (7 percent), Wells Fargo (7 percent) and Wachovia (6 percent).

Other findings include:
• Consumers on average have five conversations per week on financial products and services, and talk about 3.7 financial brands per week.
• The vast majority of financial word of mouth occurs “offline.” Face-to-face conversations (70 percent) and phone calls (23 percent) account for more than 9 in 10 of word of mouth conversations.
• 83 percent of conversations about financial products and services are one-to-one – 10 points higher than the average for all categories measured in TalkTrack (73 percent).
• Six in 10 recipients of bank recommendations rate them to be highly credible, and about half are highly likely to pass along what they’ve heard and to make a buying decision based on the recommendation.
• Only 31 percent of conversations about banks cite marketing or media, significantly less than the average for all categories about which consumers have word of mouth conversations (48 percent).

Comments

• Most Popular Articles
• Most Popular Tags