The challenges banks face with regulation and legacy IT systems hold lessons for the wider economy, writes Brian Caplen.

Great minds have been pondering the productivity mystery. Why, in a time of rapid technological change, is productivity stagnant in many advanced economies?

The UK has particular problems related in part to the tendency of firms to hire cheaply from an EU migrant pool (which may disappear post-Brexit) rather than invest in new equipment. 

But two other reasons — less often cited and especially pertinent to banks — help to explain this so-called mystery. 

The first is regulation and compliance. Banks can be forgiven for thinking that theirs is the only industry suffering from regulation overload given the slew of regulation since the financial crisis. 

But all industries are engaged in a massive regulatory push across areas ranging from data protection to employment law to health and safety. These require not only additional resources to implement but also take out management and employee time filling in spreadsheets in order to comply. Many of these new regulations have noble objectives but they are a direct hit to productivity. 

Then there are control systems run on legacy IT that also eat into productivity. These typically involve purchasing and invoice systems that require numerous steps to complete and ask for multiple lines of information. All very nice for the data collectors but they use up lots of staff time. Banks again are in the frontline as they are often running these off legacy and cumbersome IT systems. 

The US administration is currently under fire for revisiting regulation and loosening it where appropriate. In fact a thorough cost-benefit analysis of regulation and compliance across sectors could produce better outcomes, consume fewer resources and help solve the productivity puzzle. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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