OREANDA-NEWS. July 03, 2008. According to the 9th Banana Skins Banking Risk Survey carried out by the Centre for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers (PwC), the turmoil on financial markets has brought a dramatic change in risk structure, reported the press-centre of PwC.

The risks that seem to be on the rise according to Russian respondents reflect the current global concern about the global market situation and economic implications.

The survey received responses from 25 Russian bankers. The respondents identified 30 key risks and ranked them according to priority.

Basically, Russian banks share worldwide concerns about market risks but there are several marked differences. Russian respondents are most concerned about market risks such as equities, interest rates and currencies and are much less worried about risk management quality or overregulation. According to Russian respondents, on the rise are risks connected with poor back-office operation, money laundering and increased competition due to new market entrants.

Chris Barrett, PricewaterhouseCoopers Financial Services Advisory Leader, Central and Eastern Europe, says:

“Although the Russian banking sector has been relatively unaffected by the credit crisis, which completely transformed the risk landscape of the financial world, the ‘Banking Banana Skins’ survey clearly showed that the top concerns of Russian bankers are shared by the rest of the world. In particular, concerns with liquidity, equity and macro economic trends reflect the prevailing concerns surrounding world markets and the overall economic outlook”.

The replies, including those from Russian respondents, reflect deep concerns about macroeconomic trends and general perception of credit risk as a rising threat. Russian respondents are clearly concerned about the negative impact of the global liquidity crisis which may affect the cost of borrowed funds and limit access to them.

Chris Barrett, PricewaterhouseCoopers Financial Services Advisory Leader, Central and Eastern Europe, continues:

“Whilst the concerns around market-related risks correlated closely to world trends there were several key differences. In general Russian banks emphasised market risks and were less concerned about the quality of risk management and regulation. The aspect of risk which is on the rise is the quality of the back office operations with the concern of the ability of the back office to handle both increased volumes and complexity of transactions.

This, in addition to sharp rises in rents and staffing costs, is impacting banks’ bottom lines and is seen as a strong driver for optimizing the back office function. Other risks emphasised by incumbent Russian banks were money laundering and increased competition from new entrants. Although credit risk occupied a lower place than the world average, it was still stressed by respondents as a looming problem”.

Further, they believe that volatility of the international stock markets may effect Russian equity prices and rate this risk 2nd, which is higher than that of other world’s experts.

According to the survey, the respondents fear that the central Bank may increase interest rates in an effort to curb inflation. The risk related to the interest rates fluctuations ranks 3rd in Russia and 9th globally. In the Russian survey, the risk has gone up from 9th in 2006. 2007 gave us new reasons to worry about credit risk: Russian banks regard it as a major issue and rate it 4th as a rising risk.

Macroeconomic trends are ranked fifth both globally and in Russia, despite widespread belief that emerging markets (including Russia) have been less affected by the credit crunch than more developed markets.

The Russian banking sector’s large exposure to the falling dollar, mixed messages from economists and regulators regarding the need to strengthen the rouble and the government’s push to minimize dollar-denominated business all added to the concern. Russian respondents rank currency risk higher (6th) than their international counterparts (13th).

Fraud has long been perceived as a high risk in Russia, and it still ranks 9th compared to 11th in the global ranking. According to PricewaterhouseCoopers Economic Crime Survey 2007, more than half of the Russian companies surveyed reported suffering one or more economic crimes in the previous two years.

Qualitative changes introduced by shareholders ahead of an IPO brought about the improvement of risk management practices in Russian banking. Risk management dropped from 5th place in 2006 to 10th in 2007 in the Russian survey; it was ranked 6th internationally. Meanwhile, the survey suggests that only 17% Russian respondents think their banks are well prepared to handle the risks, compared to 24% of their international counterparts.

Chris Barrett, PricewaterhouseCoopers Financial Services Advisory Leader, Central and Eastern Europe, concludes:

“Overall, the survey results indicate that despite strong economic fundamentals, Russian bankers do not see the local markets as completely decoupled from the international downturn and are concerned about the associated risks of operating in a bear market and a high inflation environment”.