Implementing Central Banking Systems
What is the difference between a large and small central bank today? From the perspective of scale of operations and available resource, the differences remain huge. In terms of financial market operations, however, they are perhaps becoming less distinct. Although the priorities and responsibilities of central banks continue to differ, there is more common ground than ever before.
In this increasingly independent and international environment, operational status quo is not an option for the world’s mid-sized central banks. Their performance is used as an indicator of the health and investment potential of their national economies and they are judged on criteria, such as return on investment and disclosure levels. As a result, many institutions are facing significant structural change. In many cases, they are finding that their existing operational infrastructure – and the technology that supports it – cannot cope.
The changes in structure mean that mid-sized central banks have the same business processes and systems needs as larger institutions, but face stiffer challenges. First, they have to perform similar functions to their larger counterparts, despite a deficit in the depth of their expertise and the resources available to them. Second, they often have to operate within national financial systems that may not be as sophisticated or stable as larger economies. Such budgetary and operational constraints make any investment in technology a sensitive issue. Central banks must consider not only the upfront cost but also the ongoing impact on scarce resources.
Some barriers to effective technology change are peculiar to central banks while others are common to all sophisticated financial institutions. For example, central banks are notably resistant to organisational change and their budgets are uniquely influenced by the health of public finances. In common with all institutions, however, commitment is required across departments both to implement a solution successfully and to harmonise all related business processes. Nevertheless, the impact of new technology is highly measurable and can demonstrably outweigh the burden of the selection and implementation process.
The issues that mid-sized central banks should consider when looking for technology to meet their business needs are:
One of the key differences between smaller central banks and their larger brethren is the magnitude and extent of the changes taking place in the organisation, the environment they operate in, and their supporting infrastructure. Larger central banks tend to be relatively mature organisations operating in relatively stable conditions. In contrast, smaller central banks are often pursuing ambitious programmes of business change aimed at making improvements in performance across a broad range of their operations. A major reason why systems implementations spiral over time and budget is a lack of clear project definition at the outset. This is difficult to achieve in the volatile environment that is implicit in the degree of change common to smaller central banks. The key to achieving this is for management to have a well-defined vision of where they want the bank to be in the medium term when it comes to process, organisation, and infrastructure. This vision needs to address:
When considering systems support for market operations, scope decisions centre on business process and functional coverage. Central banks deal with a wide range of asset classes, have many and disparate responsibilities, and operate across many departments and, sometimes, locations. Is it possible – or even sensible – to attempt to implement a single platform to handle all business processes? Inevitably, every institution will have processes that require their own unique systems, but the benefits of running the majority on a single ‘wall-to-wall’ system typically outweigh the short-term costs and compromises. Imagine the efficiencies that could be achieved if the majority of FX operations, domestic monetary policy operations and market-related service operations could be supported on a single platform. Often, central banks find that the key to finding a single system solution is in the organisation of the business, not the engineering of the IT.
The economics of the financial technology industry dictate that solutions fall into two broad categories: integrated systems that manage all processes on a single platform; and best-of-breed systems that provide a tailored solution for one or other discipline. Integrated systems, by definition, cannot match best-of-breed for richness of functionality. But a central bank would need to implement solutions from a variety of best-of-breed vendors to cover all their processes and functions, demanding significant ongoing investment to ensure consistent performance and to upgrade the different components at different times. This is to take into account vendors developing their systems and technology. So, best-of-breed solutions are often considered the preserve of institutions with healthy financial and IT resources at their disposal. Central banks have recently turned away from best-of-breed approaches as the cost and risks do not justify the business benefits. Moreover, often the benefits can be limited by the difficultly of obtaining a single view of financial data over disparate systems.
When implementing a far-reaching change to a complex organisation, a decision must be taken on whether to do away with the old in one go or to ease in the new regime gradually. A central bank must carefully balance the scope of the project against the risks and the resources involved. An implementation that takes place with either limited resources or appetite for risk might be taken in stages with good reason. A ‘big bang’ approach could mean less time for testing or could impose a major drain on resources leading up to implementation. On the other hand, the delays that are inherent in a step-by-step approach can impede the project. However, the two approaches are not mutually exclusive and it is possible to mitigate the risks of each. For example, the risks of a big bang approach can be offset by longer lead-in times, limited customisation and additional external expertise. Similarly, a series of lower scope implementations can be fast tracked to mitigate the costs of repeating regression testing.
A central bank is a complex machine that must regularly be serviced. It has to find a way to allocate resources to a system implementation. It can then reposition from one system to another while still running a smooth operation. This can be a particular problem for smaller central banks, where finding the resources to dedicate to a long implementation project can be costly and onerous.
This is not a pure head count issue. Smaller central banks seldom have the depth of expertise available to larger institutions. Implementation of this type of system often involves heavy configuration and business analysis activities that place high demands on the staff involved and on their understanding of operations and processes, which they may only recently have adopted. These demands can be exacerbated even further if the project scope includes introduction of new instruments or techniques as this places further demands on the business knowledge of those involved.
Once the main body of the implementation project has come to a close, a central bank still has to undergo a thorough test and conversion phase, and then eventually go live with its new or upgraded system. Not only is this process an additional drain on resources, it is also the period of the implementation most fraught with risk. To minimise this risk, central banks need to carefully assess their methods before initiating a process to switch systems.
As with many institutions of a public remit, central banks do not embrace organisational or operational transformation rapidly. Having made a significant investment in terms of time, money and resources, it is therefore crucial that a central bank is left with a system that is both manageable and sustainable for the long term. How the bank can develop its business going forward will be determined by a combination of factors: future system capabilities; ability to support the system in-house; and a vendor’s commitment to develop the system in line with new practices and functional requirements.
Although the issues and challenges that smaller central banks face are not unique, they should not be underestimated. Changes to technology that affect the entire organisation require prior planning and attention to detail at every step, if implementation is to be achieved in a low risk, cost-effective way. The management vision organisation is an essential stepping-stone to a well-defined system selection and implementation project. Input from external organisations such as the World Bank and from larger peers can help in achieving this.
Managing the impact of the implementation on the organisation, and ensuring the long-term sustainability of the implemented solution is when the choice of vendor becomes important. The bank should also know that the solution they select is sustainable and that the vendor they choose is going to be committed to their future growth and success. Not all vendors are committed to every single market in which they operate. As such, pricing is only a part of the overall equation.