Less than a month ago I discussed the disaster being experienced by the Royal Bank of Scotland (RBS) and its Irish subsidiary as a result of a software installation screwup. For RBS the nightmare continues as it now calculates the huge losses it experiencing as a result of the technology meltdown, its “mis-selling” of interest rate derivatives, and its role in the Libor scandal.
Todays financial institutions are totally dependent on their technology systems, and if rigorous, darn well near perfect, discipline is not observed then things can go wrong, sometimes horribly so and in unpredictable ways. And things often do go wrong.
Now we have Knight Capital, a key element of the trading infrastructure, creating havoc on the stock exchange–not for the first time either–as a result, predictably, of yet another premature installation of a new software system. The company suffered a $440 million loss on Wednesday. Even more importantly, it has caused chaos on the stock markets.
So here’s the point: such “unexpected” events are not “Black Swans” (the usual financier’s excuse for avoiding responsibility). They are inherent in the complexity of modern finance. And they can become catastrophic, as RBS will now surely attest.
I don’t care what a CIO or even a CEO might say: if they claim that they can eliminate the real risk of such missteps, they just don’t know what they are talking about no matter how good they are. And if such missteps are inevitable, then we simply cannot avoid the question whether the dangers posed by large, complex financial institutions and systems could outweigh their benefits.
This question demands careful, detailed and informed answers and credible risk management and recovery strategies. The issue cannot be dismissed by the predictable huffing and puffing of the captains of the financial industry.
