The nature of money and banking industry has evolved tremendously over the course of last century. Software has become a high, if not the highest, cause of financial instability. Open Source Banking software could be used to provide better regulation of banking activities through accurate monitoring.
The role of information systems in Banking has become so important that a bank should be considered as the operator of complex software systems and information services rather than the operator of vaults, buildings and branches. Consider for example the currency issuing process in a Central Bank. The only difference between a bank note which has not yet been issued and a bank note which has been issued is a decision to log in a computer database.
The predominance of information systems in the modern financial system is clearly revealed by the Kerviel case which involved SG French Bank in 2007. Kerviel, a young trader, found a way to enter data in the information system in such way that he could circumvent risk exposure procedures built in the banking software. At the same time, risk exposure information, which was available in another software subsystem of the bank, and which certain SG staff was aware of, yet closing their eyes on, was not exposed to the higher management or to regulation authorities.
The loss of 4.82 billion Euros in January 2008 was therefore a big surprise for both higher management of SG and for regulation authorities, who until then considered SG as one of the best managed bank worldwide.
Similar losses and incidents, which put the financial system at risk by reducing investor confidence, are likely to occur again until one of the major causes of this instability is addressed : software obscurity. Much information that should give a fair overview of the current assets and liabilities of a bank are actually stored outside the main accounting software of the bank. The software systems which are running besides accounting are not subject to any kind of regulatory control and, therefore, may be used to circumvent regulations either through functional inconsistencies or through temporal inconsistencies. Functional inconsistencies consists of misleading the accounting software through inaccurate representation of the bank status. Temporal inconsistencies consists of misleading the accounting software by postponing or hiding certain events.
Software obscurity in the banking system can be resolved by introducing open source banking applications as a way to model and monitor the banking activity. Obviously, we are not intending to replace existing banking software which banks invested in for decades. However, we are suggesting to introduce a reference software in the banking sector, published as open source, which defines the way a typical bank should be managed. The 'open sourceness' of this reference software is a guarantee that any citizen or authority can peer review the rules which are meant to be implemented by banks. Moreover, by synchronizing the data handled by existing software with this reference software, banks could provide to regulation authorities a very accurate picture of their activity, much more precise than what accounting can provide.
By creating an environment in which banks can not hide data and where the public can review the rules which are meant to be enforced by regulation authorities, open source banking could help restore confidence in global financial system.
Pavel Solyak is the VP Communication of Nexedi. He is strong proponent of open source in small and medium businesses.
Code is Law by Lawrence Lessig is one of the reference books which best explains the relation between code openness and legal transparency.
Report on the Financial Crisis by René Ricol has a paragraph about the way the information system are used to hide risk information to management (thanks to M. Ronai for this reference)
Was software responsible for the financial crisis - by Sean Dodson (thanks to M. Ronai for this reference)