News Column

Beware of the banana skins

June 1, 2014

Regulation and political interference topped the list of risks among the global banking industry (in first and second place respectively out of a field of 28 risks in the survey) - replacing 2012's leading threat, the macro-economic environment, which has fallen to third place), according to the Banking Banana Skins 2014 survey. The survey notes that the severity of the top three risks is on a different level from the rest. The difference in the average rating of risk number one to risk number four was greater than the difference between the next 10 risks.

However, "Although there are encouraging signs in this survey, respondents' concerns around over- regulation need to be taken seriously. It would be ironic if new banking rules ended up snuffing out the recovery," said David Lascelles, the survey's editor.

The Centre for the Study of Financial Innovation's (CSFI) biennial Banking Banana Skins survey, produced in association with PwC, identifies potential sources of risks to banks and then ranks them by severity.


This latest survey revealed the overwhelming message from respondents: the weight of new regulation around the world is becoming excessive and could dampen economic recovery and growth. The poll is based on responses from more than 650 bankers, banking regulators and close observers of the banking industry in 59 countries.

Global Financial Services Risk Leader, Dominic Nixon, PwC, explained, "While some respondents viewed the growth of regulation as necessary, we need to carefully look at the potential unintended costs and consequences it may produce. Onerous regulation could slow profitability and innovation during a time when the banks' contribution to the global economic recovery is most needed."

Political interference was also specified by respondents as causing more costs and constraints to the banking sector. Some of the strongest concerns around political interference come from Europe - where extensive measures have been proposed or adopted at both the EU and national levels to make banks safer.

CSFI Director Andrew Hilton notes, "One respondent complained of a 'gotcha attitude' against bankers; others highlighted 'gesture politics' - and one observer (perhaps, with some justification) insisted that 'politicians still do not understand how banks really work'."


However, this could be also be described as the first post-crisis Banking Banana Skins survey since it shows, for the first time in seven years, a decline in the level of anxiety about the condition of the banking system. The risk landscape it paints therefore reflects risk preoccupations in a newly evolving world where it would appear that the operating climate for banks is finally turning.

The poll shows that concerns expressed in earlier surveys about capital availability, liquidity, credit quality and exotic products in the banking system have begun to ease. Although confidence about the macro- economic outlook has also strengthened, the survey reveals strong ongoing concern about the stability of the Euro zone, and rising worries about emerging markets, particularly China where the banking system is seen to be under stress. The outlook for the tapering of quantitative easing by central banks is widely seen as crucial to global economic prospects.


A fast-rising risk in the Banana Skins ranking is technology risk, which has risen from 18th place to fourth, largely on the back of strengthening concern about cybercrime. This is a problem which, as one respondent noted 'can only get bigger' and cost banks heavily both financially and reputationally. Technology concerns also centre on back office systems which are seen to be ageing but also a low priority for investment.

PwC's Nixon commented, "As banks move towards greater digitisation, they are focusing on how to better manage technology risk and criminality as a result of concerns about the vulnerability of outdated systems to cybercrime and outages. Banks, however, need to be concerned not only with their own systems and processes but also with related reputational risks arising from third party outsourcing and off-shoring activities. Their different and possibly less stringent security standards could create the potential for data loss or leakage. The increasing need to manage the reputational risks associated with the rapid growth of social media mustn't be underestimated.

"Over the past few years, banks have improved the quality of their risk management and how they manage their capital. Coupled with reduced concerns over macro-economic risks, anxiety levels in the banking industry appear to be declining after rising for seven consecutive years. Yet, with regulation and political interference continuing to impact the industry, banks will need to carefully manage these risks while ensuring they are forward looking and focused on positioning themselves for growth in the longer term."


A breakdown of responses shows that all major respondent types (bankers, observers and risk managers) are strongly concerned about regulatory excess and political interference, as well as the state of the global economy. However non-bankers are more worried about institutional risks in banks such as the quality of governance and management; bankers play these risks down.

By region, the responses show concern about regulation and politics to be strongest in Europe and North America. The top concerns in the Asia Pacific region focus more on the macro- economy and the risk of sharp changes in interest rates.

It is perhaps no surprise that commercial and investment bankers themselves held the strongest views among the main respondent groups about excessive regulation, believing that it would harm their business. The survey said, "This was closely linked to their concern about growing political interference in the banking sector and the effect of both on banks' profitability and business. Looking ahead, bankers were also concerned about interest rate rises as quantitative easing comes to an end. They did not share other groups' strong concerns about the quality of management and governance in banks."


"On the positive side, many respondents said that banks had made risk management an urgent priority over the last couple of years. 'Banks are now devoting large scale resources to dealing with many of these risks,' said a non-executive director at a financial group in the UK, while the CFO of a major bank in Canada said, 'Banks have become better at looking forward at risks to identify what is on the horizon and adjusting for those potential challenges.'

"But others warned that risk managers were still too reactive and unable to cope with the unexpected. 'So reliant on decision processes and systems', as an academic from the UK put it, 'that they are unable to think for themselves'. Some saw this as inevitable given the scale of the task ahead. A respondent from The Netherlands said. 'Banks are too busy with compliance and clean-up of the mess from the credit crisis to spend the necessary time to look ahead at emerging risks.'"

Preparedness clearly varies but as a broad theme it would appear that banks seem to be getting better at dealing with the risks they can influence. However, "the problem is that some of the most potent threats - such as macro-economic instability and increasingly sophisticated crime - are largely outside their control," said the survey.


"The 1990s were dominated by strategic issues: new types of competition and technologies, dramatic developments such as EMU, the internet and Y2K. Many of these faded, to be replaced by economic and political risks and particularly by concern over the growth of regulation. The period after 2000 also saw the rise of newfangled risks such as derivatives and hedge funds, the latter making their first appearance in 2005.

"The 2008 survey, conducted at the height of the financial crisis, brought the focus sharply onto credit and market risks, and propelled two new entrants to the top of the charts: liquidity and credit spreads. The next two surveys, conducted at a time of great turmoil in the financial sector, showed a twin preoccupation with financial dangers (credit, derivatives, liquidity, capital) and the growing backlash against banks seen in the sharp growth in regulation and political interference.

"The present survey... shows a hardening of the view that regulatory and political interference in the industry can be damaging, but also declining concern with crisis-critical issues such as credit risk, capital adequacy and liquidity (which disappears from the top ten for the first time since the crisis began). "


1 Regulation (6)

2 Political interference (5)

3 Macro-economic environment (1)

4 Technology risk (18)

5 Profitability (7)

6 Pricing of risk (11)

7 Credit risk (2)

8 Corporate governance (9)

9 Criminality (24)

10 Capital availability (4)

11 Quality of risk management (10)

12 Interest rates (17)

13 Back office (13)

14 Change management (15)

15 Liquidity (3)

16 Sales and business practices (20) 17 Emerging markets (22)

18 Derivatives (8)

19 Social media (-)

20 Shadow banking (-)

21 Management incentives (14)

22 Currency (19)

23 Human resources (28)

24 Reliance on third parties (29)

25 Social sustainability (25)

26 Equity markets (21)

27 Commodity markets (26)

28 Business continuation (12)

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Banker Middle East

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