Banks need to make a substantial investment in IT and take a different approach to their control and governance systems if they are to reduce their operational risks, according to a report from ICAEW.
The Audit Insights: Banking report, launched by ICAEW's Financial Services Faculty provides collective insights from bank auditors on a wide range of risks facing the banking sector. It says that underinvestment in renewing core systems means that no UK bank of any scale that has been in business for many years has an integrated or fully modernised IT system.
The report says that this puts the banking industry at greater risk from cyber-attacks and operational breakdown, according to bank auditors.
Iain Coke, head of financial services at ICAEW, said: 'Bank core IT systems are an ageing patchwork of different systems, held together by complex interfaces. Replacing them will not be easy and will create the risk of system failures which could disrupt the payments system. No-one knows how much a full system upgrade will cost as major IT projects are notoriously hard to budget for. However, it is likely to cost the largest banks several billion pounds.'
Other 'red flag' issues highlighted by auditors are the need for cultural and behavioural change, the requirement for banks to review their business models to respond to the post crisis regulatory landscape, and the challenge of compatibility and consistency of performance reporting.
Bank auditors also expressed concern over the inconsistency of banks' internal models, which could potentially add to problems in assessing risk levels.
Kari Hale, chairman of the ICAEW bank auditors' working party and bank audit partner at Deloitte said: 'Bank capital ratios are a cornerstone of the regulatory system and are increasingly used by analysts to compare banks' comparative riskiness. The larger and more complex banks typically use internal models to calculate their capital ratios, but the operation of these models is subject neither to regular inspection by regulators nor to audit. Recent work by regulators has highlighted inconsistencies between banks internal models. Given their importance, the reliability of these internal models is a major issue that needs to be addressed.'
