Will the Subprime Crisis Provide a Golden Opportunity for Japanese Financial Groups to Catch up in Global IT Strategy?

Consulting Fellow, RIETI

Establishment of global IT networks in investment banks

In the course of conducting "Cross-Cultural Comparison of Global Strategic Information Systems Management in the Multinational Investment Banking Industry"1 from 2002-2007, I collected data from 11 investment banks - four American, two British, one each German, French, and Swiss, and two Japanese investment banks - on their development and progress of global information technology (IT) networks. In this paper I will summarize my findings from the analysis of these data.

First, in the latter half of the 1980s, some forward-thinking major investment banks in the U.S. started developing global IT networks. Then, from around the mid-1990s, many other U.S. investment banks began to globalize their IT networks, supported by Clinton administration economic policies that drove the shift to the New Economy centered on the financial and IT sectors. In the process, U.S. investment banks developed straight through processing (STP), which vertically connects the three layers of the front, middle, and back offices, to efficiently process transactions of diverse financial instruments including stocks, bonds, and derivatives. These banks also established a global booking system horizontally connecting their offices in New York, London, Frankfurt, Zurich, Tokyo, Hong Kong, Singapore, and Sydney. European investment banks followed suit from the latter-1990s.2

Japanese financial groups, however, failed to ride this trend. In the 1990s, while U.S. and European investment banks vigorously continued developing global IT networks, Japanese financial groups were preoccupied with other matters. For example, they had to devote a great deal of human resources to cleaning up after the bursting of the bubble economy and put much effort into post-merger integration of systems. Furthermore, many of their overseas offices had to be scaled down or closed.

After the turn of the century, Japanese financial groups continued to be tied up with making regulatory required system changes; having to adapt to the delivery versus payment (DVP) settlement system employed by stock exchanges and the real time gross settlement (RTGS) system introduced by the Bank of Japan for government bonds, to comply with requirements under the revised Financial Instruments and Exchange Act, and to prepare for the planned digital stock certificates. Consequently, Japanese financial groups continue to lag behind U.S. and European investment banks in establishing global IT networks.3

Recycling global IT network assets

The subprime crisis, which erupted last year in the U.S., may be presenting a new dimension. Hard hit by the credit crunch in the financial market, Bear Stearns entered a credit crisis, became cash strapped, and its stock price fell sharply as a result. The crisis subsided after JP Morgan Chase announced the acquisition, paving the way for rescue. The acquisition price for shares was extremely low. The market remains plagued with rumors that several other investment banks may face the same crisis. Meanwhile, as discussed above, Japanese financial groups need to bolster their global IT strategies. Given all these circumstances, it would be worthwhile discussing the idea that Japanese financial groups acquire global IT network assets that have become unnecessary for some U.S. and European investment banks languishing with impaired balance sheets. Reasons for this are as follows:

1) Expansion into overseas markets
Japanese financial institutions will not be able to dramatically improve profitability by competing with each other in the limited Japanese market. Thus, in the past several years, some of Japan's major financial groups have been stepping up efforts to create new earning opportunities by utilizing global IT networks established by U.S. and European investment banks.

2) Dynamic like molten lava
However, dynamism toward building global IT networks cannot be found in Japanese financial groups' current management strategies. Analytical results from the aforementioned research1 indicate that an investment bank, when it moves to globalize its internal IT networks, has a very powerful internal force driving dramatic globalization; a dynamism similar to molten lava.4,5 Japanese financial groups that persist with their current management strategies will have a very long way to go before their IT divisions reach the level of U.S. and European investment banks'.

3) Financial supervision shifting to stricter international control
As mentioned above, in the 1990s U.S. and European investment banks aggressively promoted globalization of their IT divisions. Following European monetary integration, concerns over Y2K computer problems, and September Eleven terrorist attacks, the international consensus on financial supervision in the 2000s is shifting toward strengthening regulatory control in areas such as post-disaster recovery programs, information security, operational risk control, and authentication of customers and other transaction partners. Though it is relatively easy to establish global IT networks while regulatory control is still weak and later make adjustments as needed to comply with new regulations, promoting globalization of IT systems after the regulations have been strengthened internationally proves a more challenging task.6,7

4) Invariability of IT asset values
Financial institutions' balance sheets list such items as buildings, land, equipment and fixtures, and investment securities under the heading of "fixed assets," and trading securities under "current assets." Generally speaking, IT-related investments - such as computers, system equipment, communication networks, and software - are recognized under equipment and fixtures. Investment securities and trading securities are assets that have been impaired by exposure to the subprime crisis. Global IT networks, which are unrelated to the ongoing financial crisis, remain unchanged in their value.

5) IT assets may be devalued to zero
However, even these global IT networks, despite supposedly being unchanging in value, become worthless if no buyer comes forward. To date, the financial industries in Japan, the U.S., and Europe have witnessed a series of consolidations. When two or more banks integrate their operations, they can rearrange and use their existing hardware, such as servers and communication equipment, by changing configurations. But this is not the case with software. Any software - even that which is cutting-edge, global-network-oriented IT technology developed, introduced, and maintained by years of substantial investment - is wiped from the hard disk if deemed unnecessary; thus devalued to zero the moment it is eliminated.

6) IT division responses to requirements in local markets
Software developed and introduced in the 1990s and maintained by the global IT divisions of U.S. and European investment banks typically provides functions to fulfill legal and system requirements in each country's financial market, such as an interface to the settlement systems of central banks and stock exchanges not only in the U.S. and Europe but also in Asia and regulatory reporting to the supervising authorities. These functions, which have been developed in accordance with each market's unique requirements, can be transferred to and, with minor adjustment, utilized by other financial institutions.

Both Japanese financial groups and U.S./European investment banks to benefit

As pointed out by Professor Joseph E. Stiglitz, winner of the 2001 Nobel Prize in Economics, investment banking is a business in which information strategy and profitability are directly linked in a fundamental way.8 Investment banks today need highly sophisticated global IT networks to give them a fighting chance against global players and survive intensifying competition in international financial markets. In the area of Internet securities businesses, there was a case of a Japanese company acquiring an American company. Recycling global IT network assets owned by U.S. and European investment banks faced with the subprime crisis might establish a win-win relationship between Japanese financial groups needing to catch up in global IT strategy and U.S. and European investment banks hoping to sell off as many redundant assets as possible.

>> Original text in Japanese

  1. Matsumoto H. (2007), "Cross-Cultural Comparison of Global Strategic Information Systems Management in the Multinational Investment Banking Industry," University of London, Birkbeck College, School of Computer Science and Information Systems (SCSIS), March 2007
  2. Matsumoto H. and Wilson D. W. (2006), "Activators and Inhibitors of Successful Global IS in the Strategic Management Cycle of Multinational Investment Banks," Proceedings of the 14th European Conference on Information Systems (ECIS), Goteborg, Sweden, June 2006, AIS
  3. Matsumoto H. (2006), "An Analysis of Japanese Management Style, History and Culture influencing Global IS Management in the Investment Banking Industry," Poster Presentation of the 14th Annual Cross-Cultural Meeting in Information Systems, official meeting of the AIS Sponsored Special Interest Group (SIGCCRIS), Milwaukee, U.S., December 2006, AIS
  4. Matsumoto H. and Wilson D. W. (2006), "Discovering the Fixed Sponsor Model: a Cross-Cultural Comparative Study of Global Strategic IS Management," Proceedings of the U.K. Academy for Information Systems (UKAIS), 11th Annual Conference, Gloucester U.K., April 2006, p. 4, Nominees for Best Paper
  5. Matsumoto H. (2006), "Cross Cultural Research in IS: Finding the Fixed Sponsor Theory," School of Computer Science and Information Systems (SCSIS), Research Day, January 2006, London Knowledge Lab of the University of London, London, U.K.
  6. Johnson P. C., Elmallah A. A., Crow S. R. and Gezi K. (1998), "International Technology Transfer: A Theoretical Development for Firm Level Analysis," Global Information Technology and Global Electronic Commerce, AIS, Americas Conference on Information Systems (AMCIS), 1998
  7. Earl M. J. and Feeny D. F. (1996) "Information Systems in Global Business: Evidence from European Multinationals," Information Management: The Organizational Dimension, M. J. Earl (ed.), Oxford, England: Oxford University Press, pp. 77-100
  8. Joseph E. Stiglitz (2003), The Roaring Nineties: A New History of the World's Most Prosperous Decade (Japanese translation by Chikara Suzuki), Tokuma Shoten, November 25, 2003, ISBN: 4198617619

April 8, 2008

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