VOLUME TEN
MANAGEMENT ISSUES

 

 

CHAPTER 22
EXECUTIVE INFORMATION MANAGEMENT AT THE STATE BANK

 

 

TABLE OF CONTENTS

22.1 INTRODUCTION
22.1.1 THE PURPOSE OF THIS CHAPTER
22.1.2 TERMS OF APPOINTMENT RELEVANT TO THIS CHAPTER
22.1.3 THE MANAGEMENT STRUCTURE OF THE BANK
22.1.4 THE NATURE OF MANAGEMENT INFORMATION
22.1.5 OVERVIEW OF THIS CHAPTER

22.2 INFORMATION SYSTEMS AND INFORMATION MANAGEMENT AT THE STATE BANK: A CHRONOLOGICAL REVIEW
22.2.1 INTRODUCTION
22.2.2 YEAR ENDED 30 JUNE 1985
22.2.2.1 Asset and Business Growth
22.2.2.2 Management Responsibility for Information Systems
22.2.2.3 Initiatives and Developments
22.2.3 YEAR ENDED 30 JUNE 1986
22.2.3.1 Asset and Business Growth
22.2.3.2 Management Responsibility
22.2.3.3 Initiatives and Developments
22.2.4 YEAR ENDED 30 JUNE 1987
22.2.4.1 Asset and Business Growth
22.2.4.2 Management Responsibility
22.2.4.3 Initiatives and Developments
22.2.5 YEAR ENDED 30 JUNE 1988
22.2.5.1 Asset and Business Growth
22.2.5.2 Managerial Responsibility
22.2.5.3 Initiatives and Developments
22.2.6 YEAR ENDED 30 JUNE 1989
22.2.6.1 Asset and Business Growth
22.2.6.2 Managerial Responsibility
22.2.6.3 Initiatives and Developments
22.2.7 YEAR ENDED 30 JUNE 1990
22.2.7.1 Asset and Business Growth
22.2.7.2 Managerial Responsibility
22.2.7.3 Initiatives and Developments

22.3 INFORMATION SYSTEMS AND INFORMATION MANAGEMENT AT THE STATE BANK: AN OVERVIEW
22.3.1 THE DEVELOPMENT OF INFORMATION SYSTEMS IN TREASURY
22.3.2 THE DEVELOPMENT OF INFORMATION SYSTEMS IN CORPORATE BANKING
22.3.3 THE DEVELOPMENT OF BANK AND GROUP-WIDE MANAGEMENT INFORMATION SYSTEMS
22.3.4 THE CO-ORDINATION OF THE DEVELOPMENT AND IMPLEMENTATION OF INFORMATION SYSTEMS AT THE STATE BANK

22.4 SUBMISSIONS MADE TO THE INVESTIGATION
22.4.1 SUBMISSIONS ON BEHALF OF THE BOARD OF DIRECTORS
22.4.2 SUBMISSION OF MR T M CLARK

22.5 CONCLUSIONS REGARDING THE BANK'S MANAGEMENT INFORMATION SYSTEMS

22.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
22.6.1 TERMS OF APPOINTMENT A(a)
22.6.2 TERM OF APPOINTMENT C
22.6.2.1 The Board of Directors
22.6.2.2 The Chief Executive Officer

 

 

 

22.1 INTRODUCTION

 

22.1.1 THE PURPOSE OF THIS CHAPTER

This Chapter of my Report provides an overview of the development and key features of the information systems by which information regarding the Bank's operations was collected, collated, and provided to the Bank's Board of Directors, Chief Executive Officer, and senior management.

The particulars of the information provided (and not provided) to the Board of Directors and to the officers of the Bank are described, in considerable detail, in relevant Chapters of this Report. For example:

(a) Chapter 4 - "Direction-Setting and Planning" describes the information provided to the Board in respect of the Bank's implementation of its strategic plans and profit budgets.

(b) Chapter 5 - "The Management of the Bank Group's Diversifiable Credit Risk" examines the information available to the Board and to Management regarding the Bank's and Bank Group's credit exposures in respect of borrowers, industries and geographic areas.

(c) Chapter 7 - "Treasury and the Management of Assets and Liabilities at the State Bank" deals with information from Treasury, and relating to the management of the Bank's assets and liabilities.

(d) Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" describes the information available in respect of the Bank's loans.

(e) Chapter 19 - "The Overseas Operations of the State Bank" describes the information available to Management and to the Board of Directors in respect of the Bank's overseas operations.

This Chapter does not re-state the description of the information available to the Board and to Management which is provided in other Chapters of this Report. Its purpose is to describe the general features of the information systems of the Bank: their development, the attention given by the Board and by Management to the Bank's information systems, and the adequacy of the information systems generally. In short, this Chapter:

(a) provides an overview of the management information systems that generated the particular information examined in other Chapters of this Report; and

(b) describes the initiatives taken by the Board and by Management directed at ensuring that the Bank's information systems were adequate.

22.1.2 TERMS OF APPOINTMENT RELEVANT TO THIS CHAPTER

The matters examined in this Chapter are relevant to the following Terms of Appointment:

(a) Term of Appointment A(a,) which requires me to investigate and inquire into:

"... what matters and events caused the financial position of the Bank and the Bank Group as reported by the Bank and the Treasurer in public statements on 10th February 1991 and in a Ministerial Statement by the Treasurer on 12th February 1991."

(b) Term of Appointment C, which requires me to:

"... investigate and inquire into and report, with reference to the above matters, whether the operations, affairs and transactions of the Bank and the Bank Group were adequately or properly supervised, directed and controlled by:

(a) the Board of Directors of the Bank;

(b) the Chief Executive Officer of the Bank;

(c) other officers and employees of the Bank;

(d) the Directors, officers and employees of the members of the Bank Group."

22.1.3 THE MANAGEMENT STRUCTURE OF THE BANK

Briefly stated, the State Bank of South Australia Act 1983 ("the Act") provides that the Board of Directors is responsible for the governance of the Bank.() The Chief Executive Officer, in this Chapter referred to as the "Managing Director", is responsible for the management of the Bank, subject to the control of the Board. A key obligation imposed on the Board by the Act is to administer the affairs of the Bank in accordance with "accepted principles of financial management".()

Both the Board and the Managing Director are expressly authorised by the Act to delegate their respective functions and powers.() Obviously, a business as complex as the Bank could not function unless the Board and the Managing Director delegated to senior management a wide range of functions and powers.

The adequate performance of the functions of the Board and of the Managing Director, and (upon delegation) by senior management, naturally depends upon them having adequate, timely and reliable information regarding all relevant aspects of the Bank's operations and activities.

This Chapter describes what the Board and Management did to ensure that systems were in place to provide that essential information.

22.1.4 THE NATURE OF MANAGEMENT INFORMATION

Information required for the prudent governance and administration of the affairs of the Bank can usefully be categorised as being of two types:

(a) Business or function-specific information: information regarding the performance of a particular business unit, such as Treasury, Retail Banking, Corporate Banking, International Banking; and

(b) Organisational performance information: information from the various business units which is consolidated in such a way as to enable Management and the Board to review the financial performance of the organisation as a whole, with a view to ensuring that the Bank is administered in accordance with accepted principles of financial management and in conformity with appropriate prudential requirements.

As I shall describe in this Chapter, the key failing of the Bank's information systems was their failure to provide to the Bank's Management adequate information regarding the organisational performance of the Bank. The Bank's information systems developed on a divisional basis; there was no effective Bank-wide collection of some important information, particularly regarding credit exposures, and poor inter-divisional exchange of information, particularly regarding the costs and constraints relevant to funding the Bank's asset growth. These are matters addressed in detail in Chapter 5 - "The Management of the Bank Group's Diversifiable Credit Risk" and Chapter 7 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" of this Report.

22.1.5 OVERVIEW OF THIS CHAPTER

In summary, the position regarding the management information systems of the Bank, can be stated as follows:

(a) The quality of information is a key factor in the governance of the Bank, and was a fundamental requirement for the discharge of the obligation to administer the affairs of the Bank in accordance with accepted principles of financial management.

(b) The Board of Directors, the Managing Director and senior officers of the Bank were aware of the importance of establishing and developing information systems capable of generating the sound decision-making information required.

(c) There existed significant shortcomings in the collation of information from the various divisions, and in the exchange of information between divisions.

(d) Although repeated warnings were issued regarding the poor quality of the information systems, and of the dangers attendant upon such a situation, no effective action was taken to correct the situation until it was too late.

(e) Those shortcomings were material factors in causing the financial situation of the Bank as described in February 1991, and in its holding a substantial number of assets which are non performing.

 

22.2 INFORMATION SYSTEMS AND INFORMATION MANAGEMENT AT THE STATE BANK: A CHRONOLOGICAL REVIEW

 

22.2.1 INTRODUCTION

The nature of the Bank's information systems is most clearly described by outlining their development between 1984 and 1990, in the context of the changing nature of the Bank's business. Accordingly, I have set out below, for the years 1984-1990:

(a) A very brief review of the growth in the assets and business of the Bank in each year (described in detail in Chapter 3 - "Overview of the State Bank and of the State Bank Group" and Chapter 4 - "Direction-Setting and Planning" of this Report);

(b) The senior manager responsible for the Bank's information systems in each year; and

(c) A summary of the information systems initiatives and developments in each year, principally the initiatives stated in the Strategic Plans and Profit Plans approved during the year for the following years.

22.2.2 YEAR ENDED 30 JUNE 1985

22.2.2.1 Asset and Business Growth

At the time of its formation on 1 July 1984, the Bank's total assets were $2,683.0M.()

It was, largely, a retail bank with its activities confined to South Australia. Twelve months later, on 30 June 1986, its total assets were $3,430.0M(), an increase over the year of 28 per cent. During the year the Bank acquired Executor Trustee Australia and Agency Co., and a 50 per cent shareholding in SVB Day Porter Pty Ltd.

22.2.2.2 Management Responsibility for Information Systems

From the time of the Bank's formation in July 1984 until December 1985, responsibility for the development of the Bank's information systems rested with Mr K P Rumbelow, who was Chief Manager, Administrative Services.

22.2.2.3 Initiatives and Developments

The strategic and profit plans approved in 1985 provide a review of the status of the Bank's information systems, and contain a number of references to the importance of strong, effective information systems. In his memorandum to the Board enclosing the Profit Plan for 1985-1986, the Managing Director, Mr T M Clark, stated that "the Plan includes significant development expenditures for the year ... data processing expenditure will rise significantly".()

In his memorandum, Mr Clark demonstrated his awareness of the relationship that bound the existence of adequate systems to the Bank's ability to engage in the development of particular business initiatives. Referring to the Profit Plan, he stated that there were:

"... of course, a number of risks in the Plan. [One of] the principal identified risks [is] ...that existing pressures on data processing resources coupled with the development effort, may prevent us adopting, or adapting, products rapidly enough to meet market requirements." ()

Many of the Bank's information systems development objectives were established in the 1985-1990 Strategic Plan, and were not varied significantly in later Strategic Plans. The major objectives were identified as being():

(a) To re-develop and extend the retail banking transaction processing system. This related to the "Hogan" system, which was being developed to process retail banking transactions. Development costs over five years were projected to be $14.1M for hardware and $11.4M for software.

(b) To re-develop branch terminal systems. This was scheduled to occur between 1986 and 1989 at a cost of $9.0M for hardware and $1.0M for software.

(c) To enhance the management information systems. Particular areas planned for enhancement were:

(i) customer and product costs and profitability;

(ii) cost and profit centre reporting;

(iii) asset/liability reporting;

(iv) pricing and balance sheet sensitivity;

(v) cash flow and liquidity forecasting;

(vi) customer, currency, industry and interest rate exposure;() and

(vii) costing.

(d) To establish office automation.

(e) To establish information systems planning and standards. This included:

(i) the drawing-up of a five year information systems plan;

(ii) the integration of data processing development and product development;

(iii) research and development; and

(iv) the development of compatible data processing between organisational units.

The Strategic Plan also proposed the acquisition of a mini-computer based wholesale banking system to support Treasury and International Banking.() This system, called Kapiti, had a budgeted cost of $0.3M for hardware and $0.5M for software. The system was designed to support money market, securities and foreign exchange dealing, and to provide documentary letter of credit processing.

There are a number of important matters raised by the content of the strategic and profit plans approved in 1985. They are:

(a) The strategic and profit plans called for the expenditure of significant sums in the retail banking area, for both hardware and software. As a business division, Retail Banking would continue to receive the major share of the Bank's information systems budget over the years, as a reflection of the need to merge and upgrade the systems operated by the predecessor banks.

As I shall describe, it is only in later years that the focus of the Bank's efforts in respect of information systems widened to include the development of relevant and useful Bank and Group-wide management information.

(b) This early focus on retail banking notwithstanding, the plans reflect the awareness of senior management, the Managing Director, and the Board() of the importance of organisational performance information, including cost and profit centre reporting, and information regarding the Bank-wide customer, currency, industry, and interest rate risks.

(c) The Strategic Plan approved in March 1985 referred in particular to the need for information systems to meet Reserve Bank requirements. The Plan stated:

"The other major area of regulatory changes is in the supervisory and surveillance activities of the Reserve Bank. They have indicated that their activities in the future will be far less based on rigid formulae and much more centred on close investigation of individual banks' management practices, with emphasis on the competence of their asset and liability management. The Bank must ensure that its management information systems are able to withstand scrutiny by the Reserve Bank." () [Emphasis added]

(d) This awareness and understanding of the need for organisation-wide monitoring was further demonstrated in a background paper prepared for the Executive Committee in October 1985 by Mr C W Guille, then Acting Chief Manager Planning. That paper, which also served as an aide-memoire in preparation for a prudential consultation with the Reserve Bank on 23 October 1985, examined "procedures in the Bank for protecting against business risk".() In it, Mr Guille highlighted the fact that:

"... while the Bank has excellent procedures for monitoring major corporate credit exposures against limits ... In the near future, however, there may be a need to:

. fully computerise and centralise limits and exposure monitoring for all customers, banks and country limits; and

. establish systems for Bankwide recording of exposures to industrial groupings ... [Emphasis added]." ()

Mr Guille was thus foreshadowing what he saw as the emerging need for the Bank to accumulate and consolidate information across the entire spectrum of its activities, rather than on a purely divisional basis.()

(e) The Strategic and Profit Plans called for the formulation of a five-year information systems plan, and the establishment of systems standards to apply across all divisions of the Bank.

22.2.3 YEAR ENDED 30 JUNE 1986

22.2.3.1 Asset and Business Growth

The Bank achieved its highest increase in total assets (in percentage terms) during 1986. By 30 June 1986, the Bank's total assets were $5,471.0M, an increase from 30 June 1985 of $1,978.0M or 58 per cent.

The State Bank Group's total assets increased from $4,130.0M at 30 June 1985 to $6,451.0M, an increase of $2,321.0M or 56 per cent.

22.2.3.2 Management Responsibility

In December 1985, as a result of the increasing demands placed on Mr Rumbelow's time by "Project S"(), and as a measure of the recognition by senior management of the "critical role of the data processing operation" (), the Board approved a redistribution of responsibilities that resulted in the merger of the departments of Finance and Planning. Responsibility for management of the Bank's information systems was given to Mr J B Macky, who had been Chief Manager, Planning.

22.2.3.3 Initiatives and Developments

The 1986-1991 Strategic Plan and the 1986-87 Profit Plan, approved in 1986, did not alter the information system direction established in 1985. The Hogan system development was under way, and the first phase of Kapiti the money-market function was installed.

The 1986-1991 Strategic Plan reviewed the status of the information systems initiatives, and observed that the only substantive enhancement to the management information systems of the Bank achieved to that time was installation of a fixed asset system in April 1986.

The Strategic Plan also noted:

"... the huge internal and external technological requirements being placed on the Bank are currently outgrowing its capacity to satisfy them. Considering the Bank's full dependence upon efficient and reliable systems, the rate at which new technological developments are occurring within the industry, and the high cost of system development, this situation may become extremely dangerous".()

Among the weaknesses it identified was that:

"SBSA is behind its competitors in a number of technology - related areas including, EFTPOS, Customer Information and Electronic delivery systems, cash management systems, home banking systems, cost and profit reporting." ()

The 1986-1987 Profit Plan() also referred to a major accounting system development which was planned to deal with fixed assets, general ledger reporting, cash flow and liquidity.

There was no reference in the Profit Plan to any information systems development in respect of the Corporate Banking division.

The Treasury department's information systems objective was to "undertake enhancements of MIS to provide full Treasury cost and profit centre reporting by the year end".()

International Banking's information systems objective was to "maximise advantages to be gained from Kapiti. At its current level of implementation Kapiti produces negligible tangible benefits whilst requiring additional staffing".() [Emphasis Added] An additional initiative was the "interface of the Telegraphic Transfer Product with Kapiti/Swift".()

The Reserve Bank raised the issue of management information in the annual prudential consultation with senior management held on 23 October 1985. The consultation was attended, for the State Bank, by the Managing Director, Mr Clark; the (then) General Manager, Retail Banking, Mr K S Matthews; the (then) Chief Manager, Finance, Mr G S Ottaway; and by the (then) Acting Chief Manager, Planning, Mr Guille.

The topics discussed during the consultation included the management information systems in place at the State Bank to enable the monitoring and control of liquidity, credit risk, credit control, and the activities of subsidiaries.()

A diary note prepared by the Reserve Bank to summarise the discussion and the impressions gained as a result of the consultation conveys a clear indication that the State Bank executives in attendance were:

"... conscious of the risks inherent in diversifying their business rapidly and of the need for adequate management systems to control those risks." ()

Yet, if there was an awareness and an understanding among senior Bank executives of the need for the monitoring of Bank and Bank Group exposures, and of the "need for adequate management systems to control [banking] risks", there was among them an equal awareness that management information supplied in a key monitoring document, namely the Monthly Operating Review, was incomplete in some significant respects. Mr Macky told the Jacobs Royal Commission that:

"... in the early days, large exposures, non-performing loans and write-offs could not be reported in the Operating Review because our systems were inadequate. This was not developed until well after I left the Planning Department. In addition the Planning Department was not able to consolidate, by customer the information regarding exposures through Beneficial and loans interstate and overseas ..." .()

22.2.4 YEAR ENDED 30 JUNE 1987

22.2.4.1 Asset and Business Growth

Throughout the 1987 financial year, the Bank and the Bank Group continued along the path of substantial asset growth.

At the close of the 1987 financial year, the Bank held assets totalling $6,846.0M, an increase of 25 per cent over its June 1986 level.() The State Bank Group's total assets increased from $6,451.0M at 30 June 1986 to $7,894.0M at 30 June 1987, an increase of 22 per cent.() During 1987 the Bank expanded its activities overseas, including London and Hong Kong, and acquired a 50 per cent interest in Myles Pearce & Company.

22.2.4.2 Management Responsibility

On 1 July 1986, Mr Macky was appointed Chief Manager, Information Systems and Subsidiaries. In the words of Mr Macky:

"Information Systems & Subsidiaries was not a department as such. I had a split responsibility. There was the IS [Information Systems] Department which I kept running. The activities as Chief Manager relating to Information Systems were very much a continuation of my previous position. But I was also involved in all of the subsidiary companies. I tried to ensure that the activities of the subsidiary companies were properly reported on and, to the extent possible, co-ordinated." ()

The load, as described by Mr Macky, was a substantial one. Mr Macky's efforts were not wholly dedicated to the development of the management and financial information systems of the Bank, at a time of increasing activity and growth across the spectrum of that organisation's business, as well as that of its subsidiaries.

22.2.4.3 Initiatives and Developments

The 1987-1992 Strategic Plan, approved in March 1987, again highlighted enhancement of management information systems as a program() of the Treasury and Finance divisions. It was expected that this enhancement would be well under way by December 1987. International Banking purchased the "EXIMBILLS" software package to provide computerised trade finance service to customers. Implementation was expected by the end of 1987.

The more significant development in the 1987 financial year lies in the change which took place in the management philosophy applied to the information systems function.

Both the Strategic Plan and the Profit Plan called for the Information Systems Department to be established as a profit centre. This change in philosophy meant that the Department would henceforth `sell' its services to other divisions and subsidiaries, through a transfer pricing mechanism. Service level agreements were to be introduced to establish minimum standards of performance for information systems operations and development projects. They represent an undertaking by the service provider - the Information Systems Department headed by Mr Macky - to the `client' - a business unit of the Bank, such as Treasury or Corporate Banking - concerning the quality of the service to be provided.

These changes were part of a wider movement within the Bank to give divisions and departments more autonomy in the management of their portion of the Bank's business. The changes accorded with the devolutionary style of Mr Clark's management, which aimed to grant substantial autonomy to the business units of the Bank.()

There are, however, significant risks in such a devolution.

(a) The first is that, given too free a rein, the various divisions of the organisation may implement systems without regard to their compatibility with those of other divisions, thus increasing the difficulty of consolidating the information needed in order to provide an overall assessment of the position of the Group.

(b) The second is that, under a `user-pays' system such as the transfer pricing scheme introduced, divisions might well resist any initiative centred on Group-wide systems, on the ground that such an initiative contributed nothing to divisional balance sheets, and, indeed, carried a divisional cost in either dollars or resources, or both.

Typically, the `user-pays' approach requires the balancing influence of a strong, centrally-oriented information systems function which will uphold the requirements of the Group as a whole. This was unlikely to be the case at the Bank for two reasons: firstly, the management philosophy of Mr Clark favoured a divisional approach rather than a Group one, and secondly, the `part-time' or `shared' management of the information systems function, deprived it of a concerted, single-minded leadership.

In his evidence to the Investigation, Mr Macky said:

"I think it's critical to note right up front during this period that the philosophy of the Bank during the whole period was that the IS Department existed as a service department, and as we got better at costing and as we got better at budgeting, the whole philosophy was that the IS department existed as a break even service department; that is that it provided the service that was requested by its customers and that they were prepared to pay it out of its budget and just did that and charged back rates that enabled it to break even. The rules were absolutely explicit. The IS department was not allowed to do work that was not budgeted by another department or was not signed off by another department." () [Emphasis Added]

The existence of a systematic process for the development of information systems strategic plans, and the existence of those plans as management tools designed to ensure the co-ordination of initiatives, become critical elements in a `divisionalised' environment. Although the Bank had expressed its intention to formulate such plans, none were prepared until 1991.

The diary notes of the consultation with the Reserve Bank of Australia held in September 1986 again raised the issue of Bank-wide management information and risk monitoring systems.

Representing the Bank at the consultation were the Managing Director, Mr Clark; the (then) Chief General Manager of a diverse portfolio which included relations with the Reserve Bank, Mr Matthews; the newly appointed General Manager, Treasury and Capital Markets, Mr J T Hazel; and the (then) Chief Manager, Corporate Banking, Mr D C Masters. Mr Macky was not present.

The short diary note of the consultation prepared by the Reserve Bank stated that:

"SBSA is actively working on improving its information systems"

and that

"SBSA acknowledged that recent growth had been too high and that there was a need to improve profitability and information systems. Management appears to be competent and to be exercising effective control."

A longer diary note prepared by the Reserve Bank on 17 September 1986 to record at greater length the topics discussed during the consultation is quoted at length below for the relevance of the matters raised therein to the issue of the Bank's information systems.

The note records that the Reserve Bank raised a number of matters that were related to the comments it had made previously about the State Bank's performance since the last consultation, including the question "Would further growth be constrained by capital, management resources and/or systems?"

"On technology and systems, Mr Marcus Clark stated that they had created a new division, called Information Systems and headed by Mr Bruce Macky, who is also responsible for the integration of subsidiary companies. He said that they were on their way towards achieving efficient information systems. Mr Kelleher noted that information was very important as it was the basis on which management controlled the operations of the bank.

Mr Marcus Clark observed that SBSA had "a lot of catching up" to do on its management information systems. He said that there had been a new system before the merger of the two banks and that there was to be further development of systems now. Mr Matthews stated that they hoped to have a good management information system by the end of 1986/87; in fact, their game plan for the year was to improve credit control and management information systems ..."

That deficiencies existed in the information systems and information management mechanisms of the Bank at that time is further evidenced by comments made in a 1987 draft report dated

March 1987, prepared by Touche Ross, one of the joint auditors of the Bank:

"It is our opinion, and the tone of this review, that the Bank has not yet come to terms with the data management, system controls and personnel expertise required to provide adequate internal control over the exposures created by operating in global deregulated markets, rather than the Bank's historically familiar locally controlled domain." ()

22.2.5 YEAR ENDED 30 JUNE 1988

22.2.5.1 Asset and Business Growth

In the 1988 financial year, the State Bank and the State Bank Group recorded again a substantial growth in their asset base. The State Bank's assets as at 30 June 1988 totalled $9,532.0M, an increase of 39 per cent over its June 1987 level. The Group's total assets also increased by 39 per cent to $11,003.0M.

During the year, Ayers Finniss commenced operations, and the Bank acquired Oceanic Capital Corporation.

22.2.5.2 Managerial Responsibility

As in the previous year, Mr Macky was the senior manager responsible for the management of the Bank's information systems.

From March 1988 onwards, however, as a result of a restructure and a redistribution of responsibilities among senior executives, Mr Macky was no longer involved with the supervision of subsidiaries. Commenting on the change, Mr Macky stated that:

"... [I] reverted to being responsible only for Information Systems again ... [I] reported to Tim Marcus Clark and focussed on getting the information systems right and looking at further development of them ... in the time [I] was associated with I.S., and despite large increases in budgets and staff, the backlog of work outstanding was never less than two years." () [Emphasis Added]

22.2.5.3 Initiatives and Developments

The Strategic Plan approved in 1988 placed greater emphasis than in earlier years on the development of systems designed to help management monitor and control the performance of, and risks faced by, the Bank's business units, rather than limiting its thrust to systems of a purely operational or data processing nature, such as those which had been provided to support the activities of the Retail Banking division.

This changing focus was reflected in the information management objectives set out for the Corporate Banking and Treasury functions, in particular.

Corporate and International Banking identified the need to use technology as a means of "monitoring and reducing risk".() To do so it was planned to "review system requirements" by September 1988 and also to provide computer based systems for all current operations by September 1988.()

Corporate Banking's major strategic initiative was to "develop management information systems focussed upon Division, Section and Account Manager performance, Product and Customer Performance, marketing database, personnel development database".()

Treasury and Capital Markets identified the need for:()

(a) front-end position keeping and management systems;

(b) asset/liability management systems;

(c) decision support and artificial intelligence trading systems;

(d) risk management systems (including global requirements); and

(e) accounting and financial management systems.

The Treasury division's strategic developments included "implementation of global management of the Bank's balance sheet liquidity and interest rate risk exposures".()

The 1988-89 Profit Plan restated the need for information systems planning, proposing the development of a more integrated approach to the development of systems through co-ordinated objectives, the development of general policies for information systems, and, finally, the establishment of an Information Systems Planning Group.()

An updated draft of the auditors' report, dated November 1987, stated that at that time the Bank had:

"... no single formal system acting as the repository of all information to facilitate portfolio management." ()

22.2.6 YEAR ENDED 30 JUNE 1989

22.2.6.1 Asset and Business Growth

During 1989, the Bank's total assets increased by 33 per cent, to $12,688.0M. Group assets increased 36.6 per cent to $15,029.0M.

The Bank established its Auckland branch in July 1988, and its New York branch in November 1988. In December, the Bank purchased the New Zealand assets of Security Pacific.

22.2.6.2 Managerial Responsibility

Mr Macky continued to be responsible for the development of the Bank's information systems, as General Manager, Group Information Systems.

22.2.6.3 Initiatives and Developments

The Strategic Plan and the 1989-90 Profit Plan emphasised the need for increased accountability and control at both the divisional and Group levels, and again proposed the development of an information systems plan as a means of better structuring and co-ordinating the necessary advances in information management.

The plans also further emphasised the shift, begun one year earlier, from strictly operational systems to management information and risk monitoring systems.

Supporting this thrust, additional information systems initiatives were identified, including:()

(a) the development of the "LIMITS" management system for monitoring loan limits on a global basis;

(b) the development and implementation of a global risk management system for determining the degree and types of risk to be incurred, identifying exposures, evaluating risk, recommending risk controls, and assessing the cost of assumed risk;

(c) the redevelopment of the loan application software;

(d) the development of project management systems to control information systems development projects;

(e) the formulation of an Information Systems Plan (3-5 years);

(f) the formulation of a one year Information Systems Division Operations Plan;

(g) the development of a mechanism for assessing financial return and impact of all major information systems Projects (existing and planned); and

(h) the establishment of the GRIMAS system.

As stated at (b) above, there was a commitment to establishing an information system to monitor group-wide risk, including the establishment of a Global Risk Management division:

"The establishment of Global Risk Exposure Management will create a more coherent environment for controlled lending and risk management. Methods of measuring and reporting of divisional performances within the Group will also be enhanced in the Plan year. However, this will require considerable accounting and system restructuring".()

The development of the group risk management systems is described in detail in Chapter 5 - "The Management of the Bank Group's Diversifiable Credit Risk" of this Report.

With the establishment of the Group Risk Management function came an intensified focus on the development of an integrated and computerised commitment register, to record and monitor risks on a Bank-wide, rather than a divisional, basis. Mr Macky told the Jacob's Royal Commission that:

"...Well into 1989 we started work on the commitment register, among many other projects, because there was a clear acknowledgment that we didn't have enough analysis or reporting tools. We weren't getting things like bad and doubtful debts quickly enough. We didn't have a group-wide exposure reporting system that enabled us to look at an individual customer and say; Corporate Banking have got some, International has got some, Treasury has got some, Beneficial has got some, etc. and X is the Group's total exposure. That capability emerged gradually over time, from early 1990 because we decided to take an evolutionary development approach to it. We did a broad data base design, and we evolved programmes as we went along.

I am unsure when I initially formed the view that there needed to be better reporting systems on a global basis for non-accruals and bad and doubtful debts except to say for a long time I had been saying that there wasn't enough management information. We didn't have enough executive information and we needed more systems." () [Emphasis added]

Even so, the Bank was to fail in its attempts at developing a single Group-wide commitment register before 1991.()

The Corporate Banking division wanted a system based on exposures by customer, whereas the Treasury and International Banking divisions wanted a system based on individual transactions.

The result was that two separate systems were developed: a Corporate commitment register (which had operated since 1984) and the LIMITS Register. Subsequent work was undertaken to provide an automatic interface so that transactions entered into LIMITS were copied to the Corporate commitment register on a nightly basis.

From that time onwards, significant efforts were made to improve the quality of the data in the system, and to provide automatic interfaces with other systems. Even so, the interface to LIMITS, for example, was not completed until 1991.

The absence of a commitment register or other system capable of generating, in a timely and reliable way, a Group-wide picture of the Bank's total exposure to customers or industry groups left the Bank particularly exposed, given a management philosophy which, in the past, had favoured a highly divisionalised approach to the conduct of the Bank's affairs.

It was, moreover, a concern held and voiced by the Reserve Bank on 15 November 1988 in the course of a prudential consultation.

The following passage is a quotation drawn from the long diary note of the Reserve Bank, dated 30 November 1988, on the issue of management systems and the ability of the State Bank to monitor and control risk:

"Mr Kelleher [Head of Bank Supervision, Reserve Bank of Australia] drew Mr Matthews' attention to a number of aspects of the bank's operations which are causing us some concern. These included the sustained rapid growth in consolidated operations (there had been almost a tripling of balance sheet footings over the last three years); increased involvement in property development financing (in both SBSA and Beneficial Finance); offshore expansion of activities (including the bank's recent establishment of operations in New York and now its proposed New Zealand branch); and the acquisition of a large number of subsidiary companies, many of which appeared to overlap in their operations. It was also noted that the majority of the growth in the bank's activities reflected growth in the corporate business. Mr Kelleher noted that the underlying rate of growth of SBSA may be too fast and we were concerned to ensure that the bank's management systems could properly monitor and control risks associated with this level of business." [Emphasis added]

The note goes on to report assurances given by Mr Matthews regarding the adequacy of the Bank's systems and management resources.

Mr Matthews' assurances notwithstanding, the assessment formed by the Reserve Bank and recorded in the same diary note, was that:

"However, while management has assured us it is able to monitor and control the consolidated operations of the bank, we remain uneasy about the extent to which operations of the subsidiaries are in fact subject to control by directors and management of the bank."

In a letter dated 28 December 1988 to Mr Matthews, Mr Kelleher reiterated the importance that the Reserve Bank attached

"... to banks having in place appropriate systems to monitor and control risks associated with their global consolidated operations."

The Bank's auditors also expressed concern. In the joint auditors' letter dated 3 May 1989 to Mr Copley, Chief Manager, Group Finance, which presented their comments on the half-year review of the Bank as at 31 December 1988, the auditors stated:

"... As previously noted, and now re-iterated, we are concerned that there is still no reconciliation between the Corporate Banking Commitment Register and the Bank's F.I.S. [Financial Information System] general ledger.

As a result, it is not possible to know whether or not all commitments and direct liabilities have been recorded on the register...

We believe that it is imperative that the Corporate Banking Department develop and upgrade an overall report or commitment register that details total direct exposure and commitment to all debtors and that this report is reconciled and agreed to the Bank's F.I.S. general ledger on a regular basis." ()

In December 1988, a debate took place among the members of the Executive Committee regarding a number of inter-related issues, among which were the division of business responsibilities and functions within the organisation structure initiated by Mr Clark and approved by the Board, the quality of management information generated within that structure and thus the quality of monitoring and control produced at both a divisional and corporate level, and the appropriateness of the structure itself to the conduct of the Bank's affairs.()

The issues raised were serious both in nature and in the intensity of the discussion they generated. They triggered another review of the organisation structure in 1989, and, perhaps more significantly, a review by the PA Consulting Group of management information and management information reporting. That review led to a recasting of the format of the management information reports produced at senior executive and Board levels from 1989 onwards.

22.2.7 YEAR ENDED 30 JUNE 1990

22.2.7.1 Asset and Business Growth

In 1990 the Bank acquired United Building Society in New Zealand. A representative office was opened in Los Angeles.

The Bank's assets increased by 36 per cent to $17,300.0M. Total Group assets as at 30 June 1990 were $21,142.0M, an increase of 41 per cent.

22.2.7.2 Managerial Responsibility

On 1 July 1989, Mr Macky, whose title had been that of General Manager, Group Information Systems, became Chief General Manager, Group Management Services, in a move which saw his responsibilities widened well beyond the limits of information systems and information management.

In the words of Mr Macky:

"... On appointment I had the responsibility for co-ordinating and supervising the activities of the Information Systems Department, the Marketing Department, the Personnel Department and the Service Quality Department." ()

1989 also saw the appointment of Mr Matthews to the newly established position of Chief General Manager, Group Risk Management, with responsibility to develop the Bank's risk monitoring and control activities on a Bank and Group-wide basis.

22.2.7.3 Initiatives and Developments

The major initiative in 1990 was the establishment, on 1 July 1989, of a specialised Group Risk Management division headed by Mr Matthews.

The 1990-1991 Profit Plan featured, among other objectives, that priority be given:

"... to the development of risk management systems with the finalisation of current work on automating all the Group's credit exposures by client group, industry and geographic location." ()

The 1990-1995 Strategic Plan also stated the need for a balance between strategic and transactional systems.()

Corporate Banking was to enhance its information systems with regard to the quality of risk exposure monitoring and management, in respect of both credit and revenue control(), and Treasury and International were to continue to seek systems to effectively deliver service and manage risk.()

Following an organisational restructure of the Bank on 1 July 1989, which had seen Mr Clark become Group Managing Director, Mr Clark wrote to members of the Executive Committee, and to the Chief Executive Officers of subsidiaries, seeking their views as to the impact the change might have on their respective responsibilities.

Mr Macky's reply highlights the predicament of the Bank and the Bank Group with regard to position monitoring, in the absence of appropriate systems. He wrote in a memorandum to Mr Clark:

"I therefore see that there is a need for all of the management roles to change far more to a group emphasis. This is, of course, quite contrary to the style that you have followed to date, which has been very much to create each of the divisions of the Bank and each of the subsidiaries as a separate operating company, to compete in the market place and if necessary with other Group members for business ...

More important, however, is the element of risk. If the Bank Board is responsible for Group risk and is assigned Group responsibilities, then it behoves us that we are all aware of the risks that are being undertaken. Current management style does not permit this to happen. Decisions are taken within the subsidiaries of which Bank people need have no knowledge. Our systems don't measure that Group risk. That leaves the responsibility clearly with you as the only person with the opportunity to understand the whole Group business and therefore the whole risk profile. That situation will remain until we have comprehensive Group risk reporting (ie not just credit risk)." ()

In his submission to the Investigation, Mr Clark expressly disagreed with the comment in his memorandum about the lack of authority attaching to the information systems function within the Bank, and pointed out that in the later years Mr Macky had control over all development of information systems throughout the Group. Mr Macky's evidence, quoted earlier in this Chapter, was however that his department was able to implement systems developments only as requested by the Bank's business units. This necessarily resulted in an absence of a fully integrated Bank-wide system.

Concern over the integrity of Group-wide monitoring was raised again in the context of the 1989 prudential consultation with the Reserve Bank.

The Reserve Bank short diary note, dated 17 November 1989, records, under the heading of "Assessment", that, while the Reserve Bank was pleased at the initiatives taken by the State Bank with regard to management structure, budgetary accounts and reporting,

"Nevertheless, some ground remains to be covered, especially in integrating the activities of the various subsidiaries in the group risk management control procedures and in assessing the risks associated with the strategy in relation to the role of offshore points of representation."

 

22.3 INFORMATION SYSTEMS AND INFORMATION MANAGEMENT AT THE STATE BANK: AN OVERVIEW

 

22.3.1 THE DEVELOPMENT OF INFORMATION SYSTEMS IN TREASURY

The information systems in place in the Bank's Treasury division are described in detail in Chapter 7 - "Treasury and the Management of Assets and Liabilities at the State Bank" of this Report.

In summary, Mr Hazel, General Manager of Treasury and Capital Markets in 1986 and 1987, said in evidence that the information systems development at that time lagged behind the growth of business in the Bank's Treasury. He said that, in his opinion:

"... [Management] should have taken a much earlier and aggressive approach to systems development than [it] did... [The Bank] did not grow in terms of systems development as it should have." () [Emphasis added].

Mr Hazel also acknowledged the disjunction at the time between the State Bank's growth strategies, and the development of the required infrastructure:

"... the emphasis was on growth and profitability. I certainly was surprised continually by the rate of growth that was undertaken and achieved and it certainly outstripped any plans that I saw, and certainly, from any personal point of view, had I known the growth would be of the order undertaken, then it would have been appropriate to have put a lot more effort and time into making sure that the systems and procedures kept up with that growth." () [Emphasis added]

Mr Mallet, who in 1988 succeeded Mr Hazel as the officer responsible for the Treasury function, told to this Investigation that, in his view, the Treasury systems never reached an appropriate level of performance during his incumbency.()

The evidence described in Chapter 7 establishes that one of the functions of the Bank needed to expand substantially in order to support the proposed activities of the new State Bank, and which was critical to the management of the Bank's overall financial position, could not be adequately and safely performed because the Bank was inadequately equipped in terms of its information systems over the period covered by this Investigation.

The information management capability of the Treasury function did not keep pace with the rate of growth of the Bank, leaving this function:

(a) unable to generate reliable data regarding its own performance; and

(b) unable to provide important information on key aspects of prudential management.

Referring to the first shortcoming, the State Bank has submitted to this Investigation that:

"Accurate profit reporting for all treasury products in Australia was not available until January 1990. Part of the problem was the state of system development and the reliability of data." ()

Referring to the second shortcoming and to the wider implications which flowed from the first inadequacy, Mr S C Targett explained that:

"... First of all, management information systems around the Bank were so poor - the only way I can describe it, when we had our problems in February [1991] we had discussions with the Reserve Bank. At that time, talking about the support package, we calculated through our Finance Department what our capital adequacy was and we got it wrong, badly wrong. So it really was a lower number and we were sailing closer to the wind in terms of their requirements to what we believed. Therefore, you could assume perhaps that [that] had been going on for a period of time before that." ()

Mr Copley, in a written submission, strongly denied the above assertion that the Finance department was responsible for getting the capital adequacy calculation wrong. He pointed out that none of the Finance department staff were present at the February 1991 meeting, and those who were present calculated an estimate of the capital adequacy ratio without access to the facts or system used. The Finance department, he says, subsequently checked the figure and it then transpired that the Reserve Bank had been given wrong information.

22.3.2 THE DEVELOPMENT OF INFORMATION SYSTEMS IN CORPORATE BANKING

The adequacy of the information systems in place in Corporate Banking is described in detail in Chapter 5 "The Management of the Bank Group's Diversifiable Credit Risk" and Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" of this Report.

Mr Masters, who headed Corporate Banking throughout the period encompassed by this Investigation, gave evidence of the deficiencies of Corporate Banking's information systems.

His evidence was that, in his opinion:

"... growth took place more quickly than systems and the proper infrastructure could be developed and as a consequence proper control mechanisms were not put in place". ()

One consequence of the inadequacies in Corporate banking's information systems was a deficiency in its ability to adequately monitor the corporate loan portfolio. Mr J B Macky gave evidence that, in the early days large exposures, non-performing loans and write-offs could not be reported in the Operating Review because systems were inadequate.()

In May 1989 the joint auditors' letter to Mr Copley stated that it was "imperative that the Corporate Banking Department develop and upgrade an overall report or commitment register that details total direct exposure and commitment to all debtors and that this report is reconciled and agreed to the Bank's [financial information system] on a regular basis".()

22.3.3 THE DEVELOPMENT OF BANK AND GROUP-WIDE MANAGEMENT INFORMATION SYSTEMS

The development of a Bank and Group-wide information system is described in detail in Chapter 5 of this Report.

In summary, the necessity for information systems to monitor Bank-wide credit risk was recognised at the Board's very first meeting in July 1984, and at the Executive Committee meeting of 6 July 1984, at which Mr P E Byrnes, then General Manager (Elect), Corporate and International Banking, presented a paper on exposure limits for the Bank. In that paper, he concluded that:

"Whatever the guidelines accepted as being prudential, it will be necessary to closely monitor the Bank's exposure. An approximate computer based monitoring system should be implemented as soon as possible. Without such monitoring the relevance of prudential limits becomes questionable." ()

The importance of this matter was reflected in the 1985-1990 Strategic Plan, and again by the paper prepared by Mr Guille in October 1985 for the Executive Committee referred to earlier. Prudential exposure limits and their monitoring were referred to during the annual and other consultations held between the State Bank and the Reserve Bank on various dates in 1985, 1986, 1988 and 1989 as being critical and urgent, and were identified as an important initiative in the strategic plans and profit plans produced in 1989 and 1990 in particular.

Nevertheless, work did not begin in any concerted manner until "well into 1989".() While the broad structure of the data collection and reporting system had been identified, and the general input requirements had been completed, much of the information available at that time from divisions and subsidiaries was either not sufficiently detailed, or was not in a standard form that could be processed by computer, or both.()

As late as February 1990, Mr N Newman, Head of Risk Information Systems, wrote to Mr Matthews, Chief General Manager, Group Risk Management, in reference to queries raised by the Reserve Bank of Australia regarding loan approval statistics submitted to the Australian Bureau of Statistics. Mr Newman reported that the information provided could not be supported by identifiable working papers, the information was based on five months' worth of estimates only, because computer reports had not been produced, and the source data was inaccurate because of misunderstood or negligent coding by operating staff.

Later that month, the Board Paper highlighted the difficulty in the collection and consolidation of industry exposure statistics:

"Some of the various processing systems of the Bank and the Bank Group currently store differing, and in some cases, incomplete data in relation to industry exposure, and therefore on and off-balance sheet exposures have been difficult to accurately compile." ()

Representatives from JP Morgan stated, in their overview of management information presented in May 1991, that, as far as capital adequacy calculations were concerned:

"... due to difficulties in the way the information is collected and compiled, the initial result calculated by the system is frequently incorrect, and must be extensively cross-checked and verified before the final result can be produced." ()

JP Morgan's representatives went further than the calculation of capital adequacy in their comments on the overall reliability of management information. The same document contains the following assessment of the State Bank's capabilities with regard to the generation of reliable information:

"At present, SBSA's financial and accounting system does not function as a coherent, cohesive system. Group-wide information is assembled only with great difficulty, often requiring considerable time and effort to re-enter data from each division or subsidiary by hand on a PC. Financial Division staff are often required to interpret the incoming data in order to fit it into standard categories or to go back to the data providers in order to get more detail or explanation. For these reasons it is subject to unusually large potential for error. Moreover, because the Financial Division is reacting to information provided by other divisions rather than pro-actively setting the standards and enforcing compliance, the bank is more open to the risk that improprieties in other divisions will remain undetected." () [Emphasis added]

The development and implementation of a Group-wide information systems was hindered by a number of factors:

(a) The highly divisionalised management structure of the Bank resulted in disparate systems being established, resulting in data reconciliation and consolidation problems.()

As the representatives of JP Morgan would state later in their May 1991 "Overview of Management Information for SBSA Group" ():

"... Individuals are accustomed to thinking of themselves as members of departments or subsidiaries first, and as members of the SBSA Group second. Consequently, they have tended to create systems which addressed departmental needs, not those of the bank. As a result, information which may be useful to other parts of the institution is not collected or exists in a form which does not correspond to the forms used elsewhere." ()

(b) The lack of authority attaching to the Information Systems department within the organisation structure of the Bank.() The department's role was effectively limited to responding to individual business division requirements;

(c) The uncoordinated and competing divisional priorities which flowed from this structural devolution of responsibilities;()

(d) A lack of understanding and appreciation among the most senior management of the Bank regarding important aspects of risk management (such as interest rate risk management) and the information tools required for the monitoring and control thereof;() and

(d) By a lack of experienced and skilled resources to manage the development of the necessary accounting and management information systems.()

22.3.4 THE CO-ORDINATION OF THE DEVELOPMENT AND IMPLEMENTATION OF INFORMATION SYSTEMS AT THE STATE BANK

The Bank's Strategic Plans called, on a number of occasions, for the formulation and implementation of standards and procedures for the planning and design of information systems on a five-year basis.

Despite that, the Board and the Managing Director did not effectively demand or enforce the achievement of that objective. In the course of this Investigation, no such information systems strategic plans were found.

Their absence is further confirmation of the impact of the divisionalised approach prevalent in the Bank, of the weakness of any sense of Group perspective or responsibility, and of the consequent weakness of the Information Systems department in matters of enforcement of a Group-wide approach to the handling of management information.

Regarding the overall philosophy that drove the development of information systems, Mr Macky stated in evidence that:

"... the philosophy of the Bank was that we had a can-do mentality and that if the growth was there and the departments were growing, then [the] IS [Information Systems] Department had to provide the facilities to make it happen and that would be one reason why you ended up with a number of stand alone systems rather than core architected systems, because had we tried to get core architected systems, you wouldn't have got them. We would have been a constrainer on growth, we would have held the place up..." ().

A major problem was the rapid growth and diversification of the Bank's business. In his evidence to this Investigation. Mr Paddison said:

"... the rate of growth well outpaced the ability to evolve systems, training and skills, and the growth was running faster than the ability of people to build skills and knowledge." () [Emphasis added]

He also said that while there eventually was an awareness at both the senior executive and Board level of the disjunction and of its potential consequences, that awareness came too late:

"... by the time the perception that the rate of growth and the lack of system consolidation had got to the point where people were starting to say ... we must do something about them ... the problems were starting to roll at such a pace that the Board and most of the senior management team were totally consumed with firefighting." ()

 

22.4 SUBMISSIONS MADE TO THE INVESTIGATION

 

22.4.1 SUBMISSIONS ON BEHALF OF THE BOARD OF DIRECTORS

In submissions made to me on behalf of certain of the non-executive directors of the Bank, it was said that:

(a) throughout the years 1985-1989, the deficiencies in information reporting systems identified before me, and the concerns about the rapid growth of the Bank and the failure of the Bank's information systems to keep pace with that growth, were not brought to the notice or attention of the Board;

(b) over that period, the Board continued to seek assurances from management as to their capacity to handle the rate of growth and were continually given such assurances; and

(c) the concerns expressed by the Reserve Bank in 1988 about the implications of the sustained rapid growth of the Bank's consolidated activities were never conveyed to the Board.

I accept that the Board of Directors was not informed of the concerns expressed by the Reserve Bank regarding the dangers associated with the rapid growth and diversification of the Bank's business activities, particularly in respect of the capacity of the Bank's information systems to provide adequate information to identify and monitor the risks faced by the Bank. I accept, too, that Management did not express concerns to the Board about the rapid growth of the Bank, or of the failure of the information systems to keep pace with that growth.

Further, the Board did, at least at the end of 1988, give express consideration to the need to review the adequacy of the Bank's "organisational structure and management information". The minutes of the Board of Directors' meeting held on 22 December 1988 record that:

"The Managing Director advised that he had been given consideration to revising the organisational structure of the Group. The Executive Committee meeting of 5th December 1988 had confirmed his opinion that the Bank should move in this direction.

State Bank of South Australia Group had grown rapidly in the past four years and this growth had created tensions, pressures and challenges. In addition, directors had indicated that they wanted better reporting on the total group and more focus on strategic issues in major areas of risk.

It was considered that it is a position for the next stage of growth, a review of the organisational structure and management information should take place to minimise the risk of change, and to have a structure in place by 1 July 1989 which would be appropriate for the next five years.

The requirement for review of management information was discussed in conjunction with the previous paper on restructure of Board Meetings and it was agreed that the Managing Director have further discussions with McKinsey & Co., Management Consultants, and PA Consulting Group on this matter and report to Board in January 1989.

IT WAS RESOLVED to approve that State Bank Management would investigate employment of management consultants, as agreed, to review the organizational structure of the Bank and management information reporting to focus top Management and Board attention on key issues and key risk areas with recommendations being made to the Board for approval."()

Nevertheless, in my opinion, the Board of Directors had before it information which should reasonably raised a real suspicion, well before the end of 1988, that the Bank's information systems may not have been adequate to meet its management information needs. In particular:

(a) First, the Board knew that the actual rate of growth of the Bank's assets was very significantly in excess of that which was planned or budgeted. In my opinion, the actual rate of growth was so excessive as to necessarily give rise to real doubts that the Bank's information systems could have kept pace. The Board did not need to be told of the Reserve Bank's concerns in order to appreciate the risks.

(b) Second, the strategic and profit plans approved by the Board each year contained express references to the need to improve the Bank's information systems and to the risks of not doing so. In my opinion, these recurring references, particularly in later plans when the Bank had already experienced very rapid growth, were such as to reasonably have required the Board to require much more information regarding the adequacy of the Bank's systems than it in fact received.

(c) Third, the Board knew that it was not being provided with some critical information regarding the Bank's risk exposures. For example, it was clear that no information was being provided in respect of the Bank's total exposure to commercial property. These information deficiencies are described in detail in the other Chapters of this Report identified earlier.

On balance, I am of the opinion that the Board of Directors did not do enough to satisfy itself that the Bank's information systems were adequate. The resolution in December 1988 to investigate the engagement of consultants to review management information reporting was, in my opinion, too little, too late: the resolution noted that the Bank had "grown rapidly over the past four years and this growth had created tensions, pressures and challenges." Even then, the Bank's growth continued, while implementation of bank and Group-wide information systems proceeded slowly through 1989 and 1990.

22.4.2 SUBMISSION OF MR T M CLARK

Mr Clark submitted to me that, whilst he conceded that the management information systems did not keep up with growth, the inadequacies which I have identified could not be said to be linked with the losses sustained. He submitted that the major reason for the losses was the need to write down the value of loans which were secured by real estate.

He submitted that non performing loans and write-offs were not a problem in the early days, and it was not the inadequacy of the systems which precluded these from being reported in the operating reviews.

He submitted too that, with the benefit of hindsight, it is now apparent that he was mistaken in accepting assurances of various senior executives that management and information systems were keeping pace with the growth. Mr Clark submitted that Mr Macky was one of the most senior executives of the Bank, and that Mr Clark reasonably regarded him as an executive of considerable ability.

For the reasons described below (in Section 22.6.1), I do not accept Mr Clark's submission that the information systems deficiencies were not a matter which caused the financial losses of the Bank.

While I accept that Mr Clark was entitled to place reliance upon Mr Macky to adequately perform his function, that reliance can only be within the scope and limitations of Mr Macky's role. As described earlier, the Information Systems department was essentially a service provider to the autonomously managed business divisions of the Bank. The department simply did not impose upon the Bank a unified, integrated system to monitor and manage Bank-wide risk. This deficiency was expressly recognised in late 1988, and led to the establishment on 1 July 1989 of the Group Risk Management division.

In my opinion, that was far too late. Mr Clark, as the Chief Executive Officer, had a particular role to play in the "management of the Bank", which I understand to mean on a Bank-wide basis. In my opinion, Mr Clark paid for too little attention to addressing the need for information that would allow the various business divisions to be adequately and properly supervised, directed and controlled. His failure to do so is difficult to understand, given the repeated expressions of concern by the Reserve Bank at prudential consultation meetings at which Mr Clark was present. Significantly, Mr Macky did not attend those.

 

22.5 CONCLUSIONS REGARDING THE BANK'S MANAGEMENT INFORMATION SYSTEMS

 

From the time of its formation in July 1984, the Bank grew rapidly in size, and diversified its operations to extend interstate and overseas, and to include non-banking businesses.

The need for adequate and reliable management information systems, including those for measuring risks across all divisions of the Bank, was recognised from the first year of the Bank's operations. Mr Clark referred to this need in his memorandum recommending the 1985-1986 profit plan to the Board of Directors. The Strategic Plan approved in 1985 referred to the need for information systems that would withstand the scrutiny of the Reserve Bank, including systems needed for asset and liability management. The need for Bank-wide recording of credit exposures was highlighted by Mr Guille in October 1985.

Despite this awareness, no constraints were placed upon the growth and diversification of the Bank's business until adequate and reliable information systems had been established. Quite the contrary - most of the Bank's officers who gave evidence, including Mr Clark, acknowledged that the Bank's rapid growth outstripped the ability of the information systems to effectively deal with important management information.

The Strategic Plan approved in 1986 expressly stated that "the huge internal and external technological requirements being placed on the Bank are currently outgrowing its capacity to satisfy them ... this situation may become extremely dangerous." In September 1986, Mr Clark acknowledged to the Reserve Bank that the Bank had a "lot of catching up to do" in respect of its management information systems. The Reserve Bank continued to warn the Bank's senior managers of the importance of adequate information systems at subsequent prudential consultations. The auditors also expressed concerns on a number of occasions.

The rapid growth and diversification of the Bank was not the only problem. The Bank was structured on a highly divisionalized basis which allowed very considerable autonomy to the various business units. The Information Systems department, headed by Mr Macky, operated as a service provider to those divisions. It did not seek to impose systems requirements upon the business units. Although a number of strategic plans had proposed the formulation of a systematic process for the development of information systems planning, none was prepared until 1991.

It was not until the end of 1988 - four and a half years after the Bank commenced operations - that action was taken to establish systems to measure and monitor risks on a Bank and Group-wide basis. The approach was "evolutionary", and so the capacity to measure Bank-wide risks "emerged gradually over time, from early 1990."

These factors - the rapid growth and diversification of its business, and the autonomous nature of its divisional structure - meant that systems were inadequate both within divisions, and on a Bank-wide basis. The result was an absence of some critical information, without which the Bank could not be - and was not - adequately or properly supervised, directed and controlled.

 

22.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

 

22.6.1 TERMS OF APPOINTMENT A(a)

Based on the evidence referred to in this Chapter, in my opinion among the matters that caused the financial position of the Bank as reported by the Bank and the Treasurer in public statements on 10 February 1991 and in a Ministerial Statement by the Treasurer on 12 February 1991 were the deficiencies and inadequacies of the Bank's management information systems.

The most important failings of the information systems have been identified and described in other Chapters of this Report. In particular:

(a) Chapter 4 notes the absence of any monitoring reports regarding the Bank's implementation of its strategic programs.

(b) Chapter 5 describes in detail the information systems deficiencies which meant that the Bank was unable to measure its total industry exposures until 1990.

(c) Chapter 7 examines the reasons for and the implications of the inability of the Bank to adequately measure its true cost of funds associated with its various lending activities.

(d) Chapter 8 describes the lack of management information regarding non-accrual and non-performing loans.

(e) Chapter 19 examines the information shortcomings in respect of the Bank's foreign operations.

The particular information inadequacies identified in those Chapters were, of course, more directly causes of the Bank's financial position. Those inadequacies were, however, symptomatic of the more general failure of the Bank to put into place an integrated and effective management information system.

The inadequacies of the Bank's information systems were caused by a number of factors. These were:

(a) Most importantly, the very rapid growth and development of the Bank's business activities, particularly in areas such as corporate and international banking, from the time of the Bank's establishment in July 1984. Simply stated, the Bank expanded and diversified at a rate that was wholly beyond the capabilities of its information systems. The Bank's systems were both inadequate to handle the volume of data, and unable to deal with the complexity and sophistication of the management information required, particularly in Treasury.

(b) The decentralised organisational structure within the Bank meant that there was no Bank-wide (let alone Group-wide) information system. Work on a Group-wide information system began in earnest in 1989, but was hampered by the disperate systems used by the Bank's divisions and subsidiaries. The most important consequence of the absence of a Bank-wide system was the inability of the Bank to accurately determine its total exposure to commercial property, a matter described in detail in Chapter 5 - "The Management of the Bank Group's Diversifiable Credit Risk". The absence of inter-divisional pricing information was a critically important deficiency in that it meant that a key constraint on new lending provided by accurate cost of funds pricing and liquidity management was absent, as described in Chapter 7 - "Treasury and the Management of Assets and Liabilities at the State Bank".

22.6.2 TERM OF APPOINTMENT C

22.6.2.1 The Board of Directors

For the reasons described in this Chapter, in my opinion the operations, affairs and transactions of the Bank were not adequately or properly supervised, directed and controlled by the Board of Directors of the Bank, in that the Board did not take adequate action directed to ensuring that the development of the information systems of the Bank kept pace with the growth and diversification of the business of the Bank, so as to be able to provide to the Bank's Board and Management timely, accurate, reliable and meaningful management information.

22.6.2.2 The Chief Executive Officer

For the reasons described in this Chapter, in my opinion the operations, affairs and transactions of the Bank were not adequately or properly supervised, directed and controlled by the Chief Executive Officer, Mr Clark, in that Mr Clark did not take adequate action directed to ensuring that the development of the information systems of the State Bank kept pace with the growth and diversification of the business of the Bank and of its subsidiaries, so as to be able to provide to the Bank's Board and Management timely, accurate, reliable and meaningful management information.