With Greece's exit from the eurozone looking increasingly likely, financial experts around the world are speculating about the effect this will have on the global economy. Some say that the contagion could spread to Spain and Italy, banks that have lent money to Greece could suffer catastrophic losses, and the entire European monetary project could crumble.
Such an outcome would undoubtedly have massive technological implications for banks, as well as any companies that carry out payment transactions. The Financial Services Authority (FSA) has requested that banks make contingency plans towards the dismantling of the euro, and many financial institutions have already put operational strategies in place for dealing with any changes.
So what impact would Greece's departure from the euro have on the technological infrastructure that runs our payment systems, and what can banks do to avoid a financial meltdown?
Single Euro Payments Area
One key issue is that payments between European Union member states are currently treated as domestic, thanks to the Single Euro Payments Area (SEPA) – an initiative that allows cashless euro payments to be made to anyone located anywhere in the EU using a single bank account and a single set of payment instruments.
The aim of the initiative is to bolster the common currency by improving the efficiency of cross-border payments, and the industry has invested a great deal of money in developing a set of harmonised payment schemes and frameworks for electronic euro payments.
If one or more countries pulls out of the eurozone, banks will have to reprogram their systems to treat those countries' payments as non-domestic, and hence reapply fees and business rules for international payments, according to Rachel Hunt, head of IDC Financial Insights for EMEA.
However, some countries have already removed their legacy domestic payment systems, while others have yet to fully migrate domestic payment legacy infrastructures to SEPA platforms, making the situation extremely complex.
“The risk is confusion, outages and lack of transparency as all this recoding takes place,” said Hunt. “Obviously the gains from payments system consolidation will be removed, creating more fragmentation.”
Although Greece's exit from the euro would be disruptive, it would not be disastrous. Most banks also already operate multi-currency systems, so Greece could revert to the drachma and the rest of the eurozone would continue to use the SEPA payments infrastructure.
If Spain and Italy were also forced out, however, the euro itself could start to fissure, and countries might start turning away from SEPA altogether. The banks would then be faced with the prospect of millions of euros worth of investment going down the drain.
Chris Skinner, chief executive of The Financial Services Club, said that organisations could end up adapting their pan-European payment infrastructures to handle multiple currencies, rather than going back to the fragmented system they had before.
He said that many companies have now moved to cloud services and reinvigorated their payment systems to make them fit-for-purpose, regardless of gearing up for the introduction of SEPA and the euro, so even if the euro disappears they will still be fit-for-purpose.
“The bankers say that, even if the eurozone falls apart, SEPA is still going to be used because it is just going to be an efficient infrastructure that can be used within the EU, whether the euro exists or not. It's created a regional capability,” said Skinner.
However, he admitted that this was a philosophical way of viewing the situation, and that in reality “we'd all be really pissed off because we wasted so much in creating it”.
Stress testing and contingency planning
Of course, introducing a new currency into the global economy cannot be done overnight. There are a number of different scenarios that could result from a country departing the euro, and banks have to stress-test their payments systems well in advance, to ensure they are prepared for all eventualities.
According to Andy Hirst, senior director of industry marketing for SAP, this is not a simple task because banks do not know what the write-down on an asset will be. Banks often end up hoarding capital – which keeps the regulator happy because it allows them to have more liquidity, but also allows them to be more flexible if disaster strikes.
For example, Santander UK said last week that it has been prevented from transferring any cash back to its Spanish parent company since December, under a voluntary agreement with the Financial Services Authority. Santander is now hoarding assets in the UK market to give a cushion against any contagion effect that may happen in Spain.
“Just thinking about Greece is not the plan. They have had to think through a number of different scenarios,” said Hirst. “What if the value of our assets in Spain have to be written down by another 10 or 20 percent? What impact will that have on the UK economy? Unemployment may go up, for instance, and the ability to grow may be downrated.”
Companies may start looking to move cash reserves outside of the eurozone, which will put extra strain on back office systems, according to Hunt, increasing the risk of outages. Bank defaults would also exacerbate the issue of stress on systems.
Hirst said that being able to model these various scenarios is an essential component of banks' contingency planning, and that many of SAP's clients have been investing in risk management systems that use in-memory computing to provide real-time access to information, in order to monitor their liquidity and level of exposure on a daily basis.
“Banks have always held this information in their systems, so it's just a case of putting it in systems that gives them real-time access,” he said. “If you look back to the Lehman days, people didn't know for a week, 10 days, sometimes three weeks what exactly their exposure was when they netted it all off.”
Just as important as having fast access to this information is the ability to interpret it easily. Another area that banks have been investing in is consumer-style visualisation and mapping technologies, that allow banks to see where the biggest exposures are and where they need to move money or capital around.
This means that, when the regulator demands to know a bank's exposure, based on a certain set of scenarios, the bank can demonstrate that it is on top of the problem and that it has access to the information it needs to answer the query.
“If you were a bank in the UK now, you would want to make sure you have a very good buffer – more than you had in the Northern Rock scenario – because many banks came within a whisker of being in real insolvency,” said Hirst.
“They've built their own buffers, they've built more liquid assets, they've learnt some of those lessons, but you need to know what that is on a daily basis, because things move very quickly.”
It is not just high value investment banking trades that could be affected by the disintegration of the eurozone, but also smaller financial institutions and retail payment systems. Gartner analyst Alistair Newton said that the lack of liquidity as a result of Greece's exit from the euro could create blockages across multiple banks.
He explained that if one bank is worried that another bank is about to go bust or has doubts about its credibility, it will hold off paying money until it absolutely has to. This can result in intra-day liquidity issues between those banks involved.
In the case of Lehman Brothers, whose bankruptcy played a major role in the unfolding of the global financial crisis, this was restricted to a limited number of banks. However, a Greek failure would be on a much larger scale, and the blockages created could filter down into the core retail payments systems.
“Every time I go and use an ATM from RBS (Royal Bank of Scotland), they give me money on the premise that my bank, which may be Lloyds, is going to settle with them at the end of the day. If RBS thinks Lloyds is a bad risk, they may shut down my access to the ATM network straight away,” said Newton.
“Equally at a point of sale (POS) terminal, they are taking a risk on the basis of my issuing banks, so even those retail systems start to grind to a halt.”
RBS is one step removed from Greece, but it is still exposed because it is exposed to banks that are exposed, added Newton. “This is the whole network effect that, on one hand is the strength of the banking business, but on the other hand can be its Achilles heel.”
To some extent this is scaremongering, because there are checks and balances within the European Central Bank, and also within the banks themselves, to ensure that a systematic failure further up the pipeline would not block up all the retail payment systems.
However, any disruption to a single point in the supply chain could cause the entire system to freeze up, meaning that the money would never gets down the bottom, and the goods would never get up to the top, resulting in total paralysis.
Newton said that, one long-term fix would be to increase transparency along the supply chain. One individual bank might potentially be banker to several parts of that supply chain, and as such they would have greater insight into the supply of funds. However, this is not likely to happen any time soon, as there are a lot of contractual issues and technological issues involved.
“As a bank technologist, probably the biggest threat you have in the short to medium term is if a supplier of some sort is caught up in this paralysis themselves. You may have outsourced your processing to a country or a vendor in a particular country that is more significantly impacted than your country,” said Newton.
“Equally if you're a technology provider within a large banking group, you may have centres of excellence distributed across multiple countries in Europe, so what was once a level playing field now has an awful lot of bumps in it, and your own supply chain may be significantly impacted.”
Newton added that IT directors in banks should be examining the weak spots in their environments and opening up lines of communication with outsource vendors, because being able to get hold of the right person at the right time is vital.
“There's the overarching financial issue of will the banks survive, but at the more prosaic technology level, you're probably looking at something around your outsourcing agreements, around your shared service or centres of excellence strategy, or it could just be around a particular technology vendor or application designer,” he said.
The resounding message from experts is that the collapse of the eurozone would not cause a technological crisis. Most banks have been preparing for such an eventuality for more than 18 months, and have contingency plans in place.
That is not to say that IT directors should be sitting back and waiting for “eurogedden” to hit. Now more than ever, they should be keeping a watchful eye on the state of their own liquidity and exposure, and continuing to test as many possible 'what-if' scenarios as possible.
Regardless of how well-prepared organisations are, a Greek exit will bring huge confusion to market, and there is always potential for other unforeseen events to unfold. By staying alert, flexible and building up their liquid assets, banks will be in the best position possible to avoid insolvency.