Banks told they must renew creaky IT systems

Complex networks bolted together after mergers are under strain, watchdog says

Britain’s banks will have to spend billions overhauling their creaking IT systems over the next few years, according to the City’s top financial watchdog.

Andrew Bailey, chief executive of the Prudential Regulation Authority (PRA), told The Independent that lenders needed to address a patchwork of computer systems.

“This is an industry with complex and quite aged IT – often complex because companies have grown up through acquisition,” Mr Bailey said. “What would be a very bold thing to do is stripping the machine down and rebuilding it instead of bolting bits together in complex fashions so you end up with a very complex architecture.”

The PRA, part of the Bank of England, is designed to make sure lenders pose no threat to the stability of the wider financial system. In a near 30-year career at the Bank, Mr Bailey has worked on the fallout from spectacular collapses such as Lehman Brothers, Barings and HBOS.

As well as ordering banks to pile capital on their balance sheets to insulate them from future shocks, Mr Bailey stress-tests their financial health and takes a view on how much cash is spent in bonuses or investor dividends.

In addition to financial weakness, some lenders have seen their IT weaknesses exposed, just as many in the industry are considering how best to close branches and shift customers to online banking.

When Royal Bank of Scotland suffered a system failure that meant millions of customers could not access their money on a busy shopping day last Christmas, it was estimated it faced a bill of £1bn to pay for an upgrade. A month earlier, Barclays’ customers could not withdraw money from cash machines for several hours.

“The world has changed,” Mr Bailey added. “We all used to have to wait for whenever it was for our statement to arrive to know what was going on in our bank account. Now many people can interrogate their accounts online. That is good, that’s innovation, but it puts a lot of strain on these core systems because it’s a world they weren’t designed for.”

Banks are also a magnet for hackers trying to breach their online security. He said: “The frequency of attempted cyber attacks has gone up substantially –as has the severity of them. It’s a big issue. You can’t mitigate it with capital, and you really can’t ever hope to finally mitigate it because they don’t go away.”