I think that as an aspect of governments taking equity or preference interest in the banks whilst simultaneously acting as 'counterparty of last resort' in the structured products and credit derivatives markets, a situation which is simply not, even medium term, tenable; the governments should insist that the banks implement modern systems which will support financial analytics in an holistic sense. Systems holistic enough that the banks' boards of management cannot use the 'we were not told' or 'we did not know' excuse for risk exposure becoming so excessive that it threatens the stability not only of the financial system but of the real economy.
Instead of the rear mirror witch hunt which is now in progress in the US, UK and Ireland, we should be focused on practical steps which the banks and governments can take immediately to strengthen the banks and to ensure that a crisis like this never happens again.
It is obvious in my view (and is a generally accepted analysis in the US) that the western economies are not viable without the financial innovation of ‘Credit Risk Transfer’ (CRT), sometimes called ‘Structured Products’, the banking system simply doesn’t have the balance sheet width to support the Demand for Money inherent in the real economy without the facility of off balance sheet or shadow banking CRT.
Therefore the necessary holistic analytic solution architecture for banking in the future must be inherently predictive, since transference of credit risk (any risk) has to be on the basis of a robust understanding and quantification of risk in the future, in other words banking executives must thoroughly understand 'economic capital'.
Thus I think that governments should insist that the banks in which they invest on citizens’ behalf embark on an investment programme to implement truly Predictive Analytic platforms right now. I would suggest that bodies like the European Commission could do well to invest in a common forum to define what a blueprint for such a system should actually look like. One could argue that the Basel II and IFRS7 standards implicitly require such a blueprint.
I have decided to develop a White Paper to contribute to that blueprint process, I have begun that development with a little sketch of such an architecture on my company website, which has had some favorable comment since I first published it and I would like to use the Analytic Bridge forum to invite comment upon my suggestions. My little sketch essay is here;-
Any software vendor or consulting firm which thinks it has the product set or ideas monopoly to solve this problem for every bank in the world is megalomanic. The necessary Solution Architecture will require the integration of competing best of breed tools from many vendors. The brief essay is focused upon the IBM Industry Models for Banking within the Infosphere product set integrated with the REvolution Computing product set of Commercialized Open Source R with High Performance Computing (HPC) support. I intend to expand that discussion to consider the SAP for Banking products; Bank Analyzer and SAP Accounting for Banks again maintaining REvolution at the top of the Predictive Analytic stack. These in my view are the best toolsets around, given my experience. (Long or limited, relevant or out of date, I hope the comments will tell me).