16 November 2023
Norman Cousins, the American journalist, was a tireless advocate of liberal causes, such as nuclear disarmament and world peace, he famously said “History is a vast early warning system”. He was probably thinking about the threat of nuclear war not about risks in our global banking system.
When regulators at the PRA, ECB and the FED, think about risk, they are on the same page as Cousins, and they have plenty of recent events to process into their early warning system. Recent market and institutional failures: GFC, Archegos, Greensill Capital, SVB and LDI, create a rich historical backdrop for the regulators.
In contrast, many banks see ‘history’ as debt that they have to carry. The legacy of systems, data and legal contracts, accumulated over decades has been regarded as a handbrake to growth and enterprise value. Their aversion to ‘history’ has been amplified as they have had to deal with endless regulatory challenges: Dodd Frank, Basel I, II and III, BRRD, SACCR, UMR and Libor. Despite huge investments in compliance to understand legacy arrangements, the banks still have a very patchy knowledge of their ‘history’.
This diametrically opposed view of ‘history’ is the reason the regulators have found it so difficult to convince the largest banks that they must sort out their legacy data and systems – and it’s also one of the reasons that there are so many unforeseen events.
The pain associated with dealing with history has created a market trope whereby challenger banks and private markets will eat the mega banks lunch because they don’t carry the burden of ‘history’. However this narrative is losing its voice, drowned out by seismic technology change, which Likezero is leading.
In this new paradigm, where technology creates a complete understanding of ‘history’, legacy pivots from being the cause of risk and cost, into the catalyst for efficiency, insights, knowledge and value. Applying AI to 1,000 clients will create some value, whereas a mega bank with 100,000s clients will know absolutely everything they need to know by leveraging the ‘history’ they hold. So, the big will get bigger (much bigger).
The excitement around these technologies has finally energised the banks to build a complete understanding of counterparty risk associated with legacy legal contracts. And as banks look to optimise their legacy relationships they will be able to agree with the Cousins who also said that “a library should be the delivery room for the birth of ideas – a place where history comes to life”.