OREANDA-NEWS. June 23, 2014. Regulation and political interference topped the list of risks among the global banking industry (No.1 and No.2 respectively) – replacing 2012’s leading threat, the macro-economic environment, according to the new Banking Banana Skins, 2014 survey

The CSFI’s biennial Banking Banana Skins survey,produced in association with PwC, revealed the overwhelming message from respondents: the weight of new regulation 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.

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.

However, the survey also shows that anxiety about the outlook for banks has started to decline for the first time in seven years, suggesting 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 Eurozone, 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 No. 18 to No. 4, largely on the back of strengthening concern about cybercrime. This is a problem which, as one respondent said: “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.

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.

“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.

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.”

Banking banana skins in Russia
Among the Russian respondents of Banking banana skins report there were 16 responses from Russia, as follows: 10 Bankers, 3 observers and 3 risk managers.

"When the annual Banana Skins survey was initiated in January of this year, noone could have anticipated the events that would unfold in Ukraine, the development of sanctions, or the volatility in the market. Since then, Russia GDP forecasts have been revised downward, exchange rates have been volatile, access to foreign capital markets has been stressed, capital flight is high, and the ability to forecast is more challenging. Even new risks have emerged in serving customers, such as reliance on foreign based card systems and the possibility that such service may be suspended or need to be replaced with a developing new national payment system. The only certainty is that nothing is certain", - commented David Wake, PwC Russia Financial Services Leader.

The Russian response was dominated by concern about the strength of the banking system, which is widely seen as inadequately capitalised, and exposed to credit risk, with less than robust risk management. A shake out of weaker banks and non-bank financial institutions is expected.

Technology risk, and the associated risk of cyber-crime are high level concerns. "Cyber-crime is blossoming" according to one correspondent, who also mentioned fraud and corruption as issues dogging the sector.

Compared to other countries, though, Russia showed less concern with the burden of new regulation, and with the risk of volatile interest rates on global markets.

The most marked differences between Russia and the rest of the world included:

Higher concerns:
Credit risk. "There is still risk in the system from over-aggressive growth in retail/consumer lending in countries like Russia and also there is still a risk that corporates have not really turned the corner and the banks have just been rolling loans over and playing a 'wait and see' game."

Capital availability. "Russian banking sector with roughly 1000 institutions is quite an unstable system. Therefore, the regulator will continue ...to increase capital adequacy ratios. For certain banks this represents high risk as investors are tending to withdraw funds from banks given the uncertain conditions in the market."

Human resources. " The pool of highly qualified specialists is not expanding".

Lower concerns:
Political interference. "It won't reflect on banks, only on organisations claiming to be banks".

Regulation. Not currently a high level concern, though one respondent warned: "Risk is gathering momentum because the government has decided to 'clamp down' as regards regulation."

Interest rates

"In this year’s survey, respondents surveyed in Russia said Credit Risk, Capital availability and the macro-economic environment were the top-3 concerns. Given events since the date of the survey, one can safely assume that the anxiety level over these areas is even higher than before. This is confirmed by feedback we have received from Banks in Russia, who report that they are focusing on how to better quantify risk, manage the cost of risk, and improve collection. Capital is needed for growth and to absorb risk - as the access to capital becomes more difficult, Banks are focused on improving their internal organisations and optimising cost", - added David Wake.

Anxiety index
In the survey we also calculated the Banana Skins Index which shows the level of "anxiety" conveyed by the scores given to individual risks. The table shows the ranking on a scale of 1-5 where 1=low anxiety and 5=high anxiety. The ranking consists of countries which provided ten or more responses. There is no clear pattern to the result since individual country scores depend very much on local conditions. It is notable, however, that China, a country whose banking system is causing much concern abroad, has the lowest anxiety level. The "anxiety level" of the Russian response was 2.96 on a scale of 1- 5, i.e. below the global level of 3.12.

Preparedness index
In the survey we asked respondents how well prepared they thought banks were to deal with the risks they had identified on a scale of 1-5 where 1=poorly and 5=well. The table shows the ranking for countries which produced ten or more responses. Interestingly, the two countries at the top, Canada and Australia, are the two most widely thought to have weathered the financial crisis reasonably well. By contrast, the two countries at the bottom, the UK and the US, were particularly hard hit.

Russia scored 2.81 (out of a possible 5), indicating a lower level of perceived preparedness than the world average of 3.04. A respondent said: "Governance and risk management are always lagging the front office".

"In the Survey, Russia respondents felt relatively less prepared than the global average, but likewise were relatively less concerned. Perhaps this is reflective of an industry already used to dealing with volatility and with a view on the long-term. On the other hand, it can be a dangerous combination when market volatility and risk increases, as it has recently. Those Banks that are best prepared to manage change effectively and take advantage of the resulting opportunities are those that will succeed in the long run", – ended David Wake.