OREANDA-NEWS. February 03, 2012. The risk of another global recession and a renewed banking crisis is high according to a new survey of the dangers currently facing the world’s banking industry, reported the press-centre of PwC.

The CSFI’s annual Banking Banana Skins survey, produced in association with PwC, puts macro-economic risk at the top of the list of 30 possible risks to banks. The poll is based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries.

The poll also shows that anxiety about the outlook for banks is at its highest level since the survey was started 13 years ago. Many respondents expect to see further bank failures and nationalisations.

The main cause of anxiety is the eurozone crisis which contains the threat of sovereign default by several countries. The shock of a euro collapse would hit banks not just in Europe but in all major regions of the world. Bankers in countries as wide apart as the US, Canada, China, Argentina and Australia put the euro crisis at the top of their list of concerns.

The first consequence of a crash would be large credit losses, which appear at No. 2 on the list. But these would be followed by a funding crisis with banks cut off from access to liquidity and fresh capital (No. 3 and 4).

Complicating the picture is the increase in political interference (5) and regulation (6) of the banking industry. Although regulatory initiatives are intended to bring about a solution to the banking crisis, they are also adding cost and distraction to banks, and making it harder for them to supply credit to the economy.

Concern about the ability of banks to manage their way out of the crisis is also high: weakness in corporate governance (9) and risk management (10) are both seen as Top Ten risks. A fast-rising risk is business continuation (up from No. 21 to No. 12), i.e. the ability of the banking system to survive the failure of a major financial institution.

Andrew Gray, banking partner at PwC, said: “Banks are clearly worried about the dangers posed by continued turmoil in the eurozone, the threat of a further credit squeeze and uncertainty created by continued regulatory changes."Against this backdrop many banks will struggle to generate adequate returns across their business. Banks will be forced to reshape their businesses and further job losses across the sector seem inevitable as banks seek to drive down costs.”

For the first time, the Banana Skins survey shows the risk outlook to be better in the emerging economies than in the industrialised world. Respondents from regions such as Latin America, Africa, Asia and the Far East ranked their prospects more positively than North America and Europe thanks to stronger growth, though they felt vulnerable to global banking shocks. However, the survey also showed mounting concern about the prospects for China as its economy slows and its banks face growing pressures.

Risks in the Russian banking sector
The Russian response was dominated by concerns over global economic headwinds and their potential impact on Russia. One survey respondent, a banker, commented: “The situation in foreign markets will be a key factor affecting the stability of Russia’s financial system; in particular, much will depend on the extent to which they manage to stabilise the European system over that period.” Future access to funding was of particular concern to Russian banks.

On the Banana Skins Index, Russia scored 3.46 out of a possible 5, versus a global average of 3.15, indicating a slightly elevated level of concern. In general, the concerns of Russian respondents closely matched those at the global level: macroeconomic and liquidity risks, and the availability of capital, among others. But there were also some differences, including:

Higher level of concern:

Equity markets: Market volatility and shaky investor confidence in Russia, particularly in the context of banks’ need for capital.

Profitability: “Reduced bank profit and interest margins due to higher capital adequacy requirements, higher fundraising costs, less revenue-generating items, and banking sector consolidation.”

Quality of risk management: “According to the recent CBR stress testing, more than half of Russia’s banks are not ready for implementation of Basel II and Basel III, which points to a lack of efficient risk and liquidity management tools.”

Pricing of risk: “Risk assessment models and risk premiums practically do not work anymore; product pricing is governed by the market.”

Currencies: “Volatility in the currency markets may lead to mismatches in assets and the financial performance of banks. Uncertainty about financial market trends does not allow for transaction stability.”

Interest rates: Uncertain market conditions due to competition with state-owned banks.

Criminality: Threat of fraud and corruption.

Emerging markets: “A dark horse [is] high inflows of speculative capital.”

Lower level of concern:

Credit risk: “As for credit risk, the situation is more or less stable: most companies are demonstrating a strengthened position due to the potential growth in various industries.”

Management incentive programmes: This is not as big an issue as it is in many other countries.

Political interference and regulation. A strikingly low level of concern compared to most other countries. However, the implementation of Basel III could cause problems.

Preparedness

Survey participants were asked: “How well prepared do you think banks are to handle the risks you have identified, on a scale where 5=well and 1=poorly?” Russia scored 2.67 compared to a global average of 2.96, suggesting a slightly lower level of preparedness. A banker commented: “We are entering a new area in the economic environment where there is hardly any experience at the management level.”

“We live in a volatile and hard-to-predict world, especially in the Russian banking market. Banks in Russia have advanced substantially in their risk management efforts,“ Geoffrey Nicholson, PwC Russia Partner, commented. “However, there is still a great deal to be done. This is especially true as the external market and regulatory environment remains challenging, and new regulations appear frequently. Adopting a comprehensive, long-term risk management strategy can help banks to see beyond their day-to-day risk management tasks, and give bank management a clear direction for the next steps ahead.”

The CSFI Banking Banana Skins 2012 survey featured 13 responses from Russia, 12 from bankers and 1 from a regulator.