NAB's shared systematic failure

Foolish short termism has not only made a large slab of Australian banks operation a commodity business so it has left most of our large banks with a second deep seated problem – their base computer systems are out of date.

At the weekend I explained how the Swan measures were very cleverly crafted so that there was little immediate impact, which satisfied the institutions and their "six months ahead” view of the world, but longer term it would reduce bank margins (Swan will make banks suffer, December 12)

On the systems front the National Australia Bank's computer system breakdown has been a dramatic wake-up call that problems have been pigeonholed for too long.

Exactly what caused the NAB breakdown has not been announced, but, like the other banks, the NAB's core transactions systems were written way back in the late 1960s in a computer language known as COBOL. There are very few COBOL programmers left in Australia which forced much of the system to be sent to India. The NAB executives who set up the system have long since retired.

The old system has been an accident waiting to happen because it has been the subject of an enormous number of add-ons and alterations. But most of the other banks are in a similar situation. The CBA is probably the most advanced in updating its system and the NAB is now undertaking a similar exercise. The Westpac upgrade is helped by the fact that the St George bank developed its systems much later and does not have the same core difficulties.

Former bank chief executives should have tackled the issue and made the investment. But undertaking such an investment would have affected short-term profitability. It was much easier leave the problem to the next CEO – and after all the outmoded system was working.

In addition any sweeping change to the base systems meant there was a risk of a catastrophe.

Australian banks are not the only organisations that have this problem. The NAB IT disaster will force all those companies with old systems to face the short-term cost and modernise.

Why the similarity with the dispute with the government? The banks' base case that they were not increasing margins but had rising costs was a good one. They did not have the management skills to argue it in the public arena and even if they had those skills the rising profits made it very difficult.

Instead they took on the Parliament and snubbed their noses at the Treasurer. The measures announced by Wayne Swan will hit the long-term positions of the banks because it will commoditise their product.

What the banks should have done was to allow some pain to take place and then undertake a public campaign involving talk back radio. But like the systems change, that would have affected short-term returns.