Recovery wakes up to extreme risk

The terrorist attacks of September 11 posed an unprecedented challenge to banks specializing in global custody. Most of them seemed to cope well enough. But the scale of the disruption has focused attention on the need to develop back-up and recovery systems that can cope with widespread destruction, rather than merely deal with localized IT glitches, and can encompass communications links with peer banks and clients.

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Bank of New York: its dominant position in custody meant it bore the brunt of dislocation

In the aftermath of the September 11 attacks on New York, sales of mobile phones shot up as global custody specialist Bank of New York made an emergency purchase of 4,000 phones for its staff to maintain contact with clients. With the two main lower Manhattan exchanges of telecom operator Verizon knocked out, keeping customers in touch with how the bank was coping became an overriding objective.
How do you get hold of 4,000 phones immediately in a terrified, rubble-strewn city? It was an unexpected logistical problem no-one had foreseen; requiring more than a quick jaunt down to the nearest cellphone shop with the corporate credit card. As Tom Perna, head of global custody at Bank of New York, puts it: "This presented us with quite a challenge."
Disaster recovery has leaped up the agenda. In the weeks since the attack the talk in the industry is that the entire system came far closer to collapse than realized. No longer does information technology systems failure loom as the principal worry. Planning is now being undertaken routinely for extreme risks such as an attack that is deliberately designed to cripple the financial markets' intricate systems over a wide area.
September 11 tested existing disaster recovery plans to the full. Banks specializing in custody were inevitably at the centre of disruption. It was crucial that the likes of State Street, JPMorgan and Bank of New York exhibited extreme resilience. On the face of it their recovery plans came through pretty well. One industry insider says: "I think the fact that there were very few explicit complaints showed the extent to which the banks coped."

Even so the performance of one institution, Bank of New York, has attracted criticism. "Bank of New York could have been much more on the ball," says a fund manager. "While others were making special efforts to keep us fully up to date with the latest on our positions - with daily conference calls for example - Bank of New York's communications left a lot to be desired."
Other global custodian specialists also say privately that Bank of New York did experience difficulties that other custodians didn't face. One senior source at another bank comments: "From our perspective, it certainly does look as if they got themselves into a bit of a spot. I'd say that there could definitely have been improvements in their contingency planning."
One of Bank of New York's key vulnerabilities was the fact that its sites were close to each other. Four buildings, including major data processing centres from which 8,300 people had to be evacuated, were located within a few blocks of each other. Bill Anderson, head of global custody at Brown Brothers Harriman in Boston, says: "Sure, they had problems with their location, and they need to address that."
Computer inadequacies
Processing of data is also at the heart of the problems that beset Bank of New York. Another source at a leading fund manager questions the bank's preparedness in this aspect of the business: "I think that Bank of New York was just not able to deal with the processing issue and it was this that got them into real trouble. The computers weren't up to date, didn't have the data available and this made the recovery operation all the more difficult."
The fund manager argues that this issue should really have been one of the easier things to deal with - if the technology is in place, processing should not be a problem.







Tom Perna

Others go further. One banker doubts whether Bank of New York maintained, as it claimed, the real-time capability to back up all its vital data. It's one thing to relocate operations to another building, but in a crisis the risk is that vital data will be lost because there is no fallback centre at a different location automatically backing up data.
"I wonder if they truly had the capability to do this or whether it was a case of grabbing tapes as they ran out the door," says the banker. "This is not the way to be going about this."
Bank of New York's Perna rejects criticism that his bank's contingency plans were found wanting. First, with regard to locations, Perna says operations were swiftly transferred to the bank's back-up sites in New Jersey and upstate New York. The bank maintains that its business was fully backed up and processing was continued throughout the immediate aftermath of the emergency. No crucial data was lost permanently. Although there were a number of failed payments, the bank claims that these were soon rectified and were largely because counterparties were themselves temporarily off line.
"We seemed to be taking the blame for everything short of causing the problem in the first place," Perna complains. Bank of New York's dominant position in custody meant that in such circumstances it would bear the brunt of the dislocation. Perna says: "I think we ended up flying a lot of cover for people when the whole industry was dealing with this issue and, as time's gone by, I think people have recognized that this was an industry-wide issue, not a Bank of New York issue. I mean, the New York Stock Exchange was shut down for a week, so that shows the extent of the problem."
Perna feels that Bank of New York, and the industry as a whole, has proved its resilience and customers should take confidence from this for the future. But he acknowledges that preparations will have to be geared up for the vast scale of the threat. It is one thing planning for power outages because of fire, and quite another to counter the devastation of a ruthless and coordinated wave of suicide attacks. Most existing measures assume that buildings will at least still be standing. "The world has changed," says Perna, ominously. "People are going to have to adapt their plans accordingly."
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