The Shocking Disappearance of Banking’s Key Functions in the Cloud! #DevastatingTrend

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In the realm of global finance, there are certain aspects that can send shivers down your spine if you delve too deep. Repo and money markets are just the tip of the iceberg. However, the true horror lies in the IT outsourcing practices of banks, where there is no safety net to ensure a smooth resolution in times of crisis. As one wise bank supervisor once stated, there is no database provider of last resort. This eerie reality is vividly portrayed in the ECB Outsourcing Register. The recent annual report by the ECB’s Banking Supervision committee sheds light on the unsettling truth within the banking industry.

1. Proportion of non-compliance with regulatory guidelines for “critical functions”: Nearly 10 percent.
2. Average number of “critical” service providers per large bank: 58 percent.
3. Average number of subcontractors on a banking industry outsourcing contract: Approximately four.
4. Proportion of critical outsourcing providers that are easy to replace: Just 17.7 percent.

Let’s face it, contemplating the spider web of supply chains for software-as-a-service and offsite data centers that underpin the European banking system is enough to make anyone uneasy. The rise of cloud computing has further accentuated this reliance, with cloud services accounting for more than a fifth of the total infrastructure. European banks find themselves tethered not only to a few key outsourcing providers but also to non-EU entities.

The growing dependence on non-EU firms by European banks, with the majority of contracts with companies tied to US corporations, raises concerns of strategic independence in a world of escalating geopolitical tensions. As highlighted in the book “Underground Empire,” authored by Henry Farrell and Abe Newman, the US wields influence over crucial global systems, such as the dollar banking system and the internet. However, the intertwining of finance and distributed computing has birthed a new concern: the Euro area banking system’s heavy reliance on server farms with potential foreign ownership.

Amidst this web of uncertainty, there is solace in the expansive regulatory definition of a “critical function,” which does not necessarily imply total vulnerability to external control. Yet, the current setup leaves little room for confidently assessing the true level of risk inherent in the system.

The intricate interplay between cloud contracts, outsourcing providers, and geopolitical power dynamics paints a complex picture of the European banking landscape. In this era of heightened uncertainty, it becomes imperative for stakeholders to reevaluate their dependencies and strive for a more resilient and self-sufficient financial ecosystem. The stakes are high, and the time for proactive measures is now.