TORONTO, Feb. 1 /CNW/ - The greatest risk now facing the banking industry globally is not financial but political, according to the latest 'Banking Banana Skins' survey conducted by the Centre for the Study of Financial Innovation (CSFI) in association with PricewaterhouseCoopers (PwC). The annual poll of banking risks put "political interference" at the top of a list of the 30 most serious risks to banks during this period of financial crisis. In Canada however, political interference and over-regulation were seen as lower concerns.
"Our banking practices and regulatory environment have shone brightly throughout the downturn," says George Sheen, partner and national leader of the Financial Services practice for PwC in Canada. "As a result, there is not the same political impetus for change in Canada as in many other countries, though political interference and over regulation were still ranked high."
Although Canada has had fewer credit losses than most other countries, credit risk remains the top concern in the Canadian banking community until the recovery firmly takes hold. What is striking, however, is the low risk attached to capital availability (placing 24th vs. number six in the world), suggesting that even if market conditions worsen, Canadian banks still believe they will have ready access to additional capital.
"As we emerge from the recession, Canadian banks are well positioned to leverage their reputation for financial stability," says Diane Kazarian, partner and national leader for the Banking and Capital Markets industry practice at PwC. "Canadian banks are currently riding a wave of international favouritism for their leadership, risk management practices, operating platforms, and product and channel strategies. Furthermore, each of the banks has a Tier 1 capital ratio that's well above the Office of the Superintendent of Financial Institutions' minimum requirement of 7%."
Global respondents, who include practising bankers as well as close observers of the financial scene and regulators, said that the "politicization" of banks as a result of bail-outs and takeovers posed a major threat to their financial health.
This view was shared by all types of respondents in all the major banking regions, though for different reasons. Bankers saw politics distorting their lending decisions. Non-bankers said that political rescues had damaged banks by encouraging reckless attitudes. Regulators worried that governments would withdraw their support from banks before they had time to rebuild their financial strength, precipitating another collapse.
"Political interference" has never appeared as a risk in 15 years of "Banana Skins" surveys. The top risk is closely linked to the number three risk, "Too much regulation", and the concern that banks will be further damaged by over-reaction to the crisis.
David Lascelles, survey editor for CSFI, said: "It is ironic that politics should emerge as a risk when banks around the world had to be rescued in the first place. But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap."
Many of the risks identified by the survey - notably credit risk at number two - stem from concern about the effects of the recession on the banking industry. The bulk of respondents were gloomy about the outlook, fearing a "double dip" recession with a further wave of bad debts hitting the banks. The mood was particularly dark in the Asia Pacific region where respondents are worried that a new asset bubble may burst, bringing about a collapse of confidence in the credit markets.
The poll also reflects concern about management controls. Concerns such as the quality of risk management, corporate governance and management incentives all feature prominently as potential sources of risk.
But some risks are also seen to be easing as the world pulls out of the crisis. A number of financial risks - liquidity, derivatives, credit spreads and equities - are down on the previous poll in 2008. A striking fall is the risk from hedge funds, down from 10th to 19th, as their threat is seen to diminish. "Financial plumbing" risks are also seen to be low: back office, payments systems etc. All performed well in the crisis. Environmental risk is at an unchanged 25th position despite the heat generated by the Copenhagen Summit.
The poll is based on responses from 450 senior figures from the financial world in 49 countries. Below is the full list of Banana Skins for the World and Canada:
Banking Banana Skins 2010
(2008 ranking in brackets)
1 Political interference (-) 1 Credit risk
2 Credit risk (2) 2 Risk management quality
3 Too much regulation (8) 3 Macro-economic trends
4 Macro-economic trends (5) 4 Political interference
5 Liquidity (1) 5 Too much regulation
6 Capital availability (-) 6 Liquidity
7 Derivatives (4) 7 Derivatives
8 Risk management quality (6) 8 Management incentives
9 Credit spreads (3) 9 Commodities
10 Equities (7) 10 Currencies
11 Currencies (13) 11 Hedge funds
12 Corporate governance (16) 12 Credit spreads
13 Commodities (12) 13 High dependence on technology
14 Interest rates (9) 14 Emerging markets
15 Fraud (11) 15 Equities
16 Management incentives (17) 16 Corporate governance
17 Emerging markets (18) 17 Rogue trader
18 High dependence on technology (15) 18 Fraud
19 Hedge funds (10) 19 Interest rates
20 Rogue trader (14) 20 Business continuation
21 Business continuation (23) 21 Payment systems
22 Retail sales practices (20) 22 Retail sales practices
23 Conflicts of interest (21) 23 Back office
24 Back office (19) 24 Capital availability
25 Environmental risk (25) 25 Money laundering
26 Payment systems (27) 26 Merger mania
27 Money laundering (24) 27 Environmental risk
28 Merger mania (28) 28 Conflicts of interest
29 Too little regulation (29) 29 Too little regulation
30 Competition from new entrants (30) 30 Competition from new entrants
Banking Banana Skins 2010 is available ((pnds stlg)25, $45, (euro)35) from CSFI, 5, Derby Street, London W1J 7AB. +44 (0)20 7493 0173. email@example.com
The Centre for the Study of Financial Innovation, founded in 1993, is an independent not-for-profit think tank based in London which researches the future of financial services. It has an affiliate in New York, New York CSFI. The CSFI has been producing regular Banana Skins surveys since 1995. www.csfi.org.uk
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