Banking Banana Skins 2010
After the ‘quake
The CSFI survey of bank risk
In association with In association with
Centre for the Study of Financial Innovation
C S F I / New York CSFI
The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field – particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open and efficient markets. Trustees Minos Zombanakis (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Brian Pearse Staff Director – Andrew Hilton Co-Director – Jane Fuller Senior Fellow – David Lascelles Programme Coordinator – Lisa Moyle Governing Council Sir Brian Pearse (Chairman) Sir David Bell Geoffrey Bell Robert Bench Rudi Bogni Peter Cooke Bill Dalton Sir David Davies Prof Charles Goodhart John Heimann John Hitchins Rene Karsenti Henry Kaufman Angela Knight Sir Andrew Large David Lascelles Philip Martin-Brown Robin Monro-Davies Rick Murray John Plender David Potter Mark Robson David Rule Sir Brian Williamson Peter Wilson-Smith Minos Zombanakis
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no a few months ago. therefore.C S F I / New York CSFI
NUMBER NINETY TWO
C S F I / New York CSFI
Preface Prefaceproducing its Banking Banana Skins survey almost annually since 1994. no surprise that bankers todaybit harder. awake at night – besides the size of their bonuses. suppose that’s well than the threat of ritual disembowelling which seemed the the cards only surprise that bankers today put “political interference” at the top of their But. That was what the industry felt – though one can certainly make a case that what the industry That said. what is going that the not predictive. But. as though senior bankers (who are well-represented in our survey) were like sometimes seems compulsive shoplifters. in the raw data that we have accumulated a put “political interference” at the top of has to workthe meantime.that people in the financial services sector – as well as those who watch. regulate and succour them – believe are the next “banana sector – – well author. we hope to work the raw data that we have accumulated multi-year data on what sciencesenior City types What we offer is an increasingly valuable set of a bit harder. The CSFI has been
latterly with generous support from PricewaterhouseCoopers.org. that it is not predictive. at decadeI – and that maybetter generate some even more fascinating findings. better still. since the science of statisticstheir Banana Skins list. Banana Skins list. significant just how close to the top credit risk.uk Web: www. looking at the list regulation or. David Lascelles – believes is going to happen. the reader. regulate and succour them – believe are the next “banana skins” on which the industry is likely to slip. of course. In particular. That was what us industry felt – though one can get it right. findings. don’t blame the that earlier surveys didn’t alwayscertainly make particular. therefore.org. It is not what skins” (most of whom are extremely close toNote. The CSFI has been producing its Banking Banana Skins survey almost annually since 1994. happen. pride of place at the top of the Banana Skins list went to “too much regulation”. Banana Skins since 1996 (page ??). it is really needed was either more of the most important smarter regulation. induced) misery. It is a distillation of what others on which the industry is likely to slip. of course. It significant just how close to the top credit be caught and to and put out of their (peer pressureinduced) misery. who Lascelles – believes is going to happen. in on meantime. in 2005 and 2006. others (most of whom are extremely close to what is going on at the financial coalface) expect to So. advanced in the last least. almost begging to risk. don’t blameindustry really needed was pride more regulation or. It is a distillation of what the CSFI – fear may happen. lookingas though senior bankersimportant Banana Skins since our survey) were it is compulsive shoplifters. I suppose that’s better than the threat of ritual disembowelling which Andrew Hilton seemed on the cards only a few months ago. The intention has always been to identify those concerns latterly with generous support from PricewaterhouseCoopers. those concerns that people in the financial not what The intention has always been to identify Note. smarter regulation. surveys didn’t always get it right.csfi. don’t blame us that. like That said.uk
. derivatives be risk management have been. Over the more fascinating we hope awake at night – last decade – and that may well generate some even next few months. to make. don’t blamemay happen. of multi-year data on what keeps senior City types But those offer is an increasingly valuable setto make. So. or or the author. better still.on at it is financial coalface) expect to happen. Over the next few months. It is services the CSFIas or theas those Davidwatch. derivatives and risk management have been. or fear us that earlier in 2005 and 2006. It sometimes seems at the list of the most (who are well-represented in 1996 (page 10). either of place at the top of the Banana Skins list went to “too much regulation”. In a case that what the us that. at least. What we are conclusions for you. almost begging to be caught and to be put out of their (peer pressureBut those are conclusions for you. the reader. since the keeps of statistics has advanced in the besides the size of their bonuses. Director CSFI Andrew Hilton Director CSFI
This report was written by David Lascelles Cover by Joe Cummings This report was written by David Lascelles Cover by Joe Cummings
CSFI / New York CSFI E-mail: info@csfi.
John Hitchins UK Banking Leader PricewaterhouseCoopers (UK)
CSFI / New York CSFI E-mail: email@example.com. The survey does get it right sometimes and so this year’s survey could be a well timed warning for politicians not to overreact. The need to rebuild trust that the last survey highlighted has become even more acute. Liquidity was the top risk last time and came closer in the autumn of 2008 to bringing the entire system down than any previous banana skin. Once again a brand new banana skin – political interference – heads the list.C S F I / New York CSFI
PricewaterhouseCoopers is delighted to sponsor another year of Banking Banana Skins.uk
.uk Web: www. events since then make for a fascinating survey. although many retain fears that the worst is not yet over. With political interference as the top risk and too much regulation at number three there is clear sense that change may be forced onto the industry from outside. Back then. A worrying theme is the question of whether the crisis has taken the industry’s future out of its own hands. It is always interesting to look back at the previous survey to see which of the top banana skins were slipped on subsequently. few thought we would see so many banks either collapse or require rescue. Respondents are also beginning to focus on what comes after the crisis. This is the first economic crisis that has drawn out long enough to have two Banana Skins published (let us hope it doesn’t continue for a third!).csfi. It has been an extraordinary eighteen months for the banking industry since the last Banana Skins was published in May 2008.org. Many respondents make the point of how deeply unpopular the banks have become among the populace at large. hence credit risk retains its number two spot. As ever there is a richness of perceptive comment threaded through the survey which repays a careful read.
selected by a CSFI/PwC panel. respondents were asked to describe. in their own words. they were asked to rate a list of potential risks.org. and received 443 responses from individuals in 49 countries. Croatia Czech Rep. steady or falling.uk Web: www. their main concerns about the financial system over the next 2-3 years. banking regulators and close observers of the banking scene around the world. In the second.org. they were asked to rate the preparedness of financial institutions to handle the risks they identified.csfi. The survey was carried out in November and December 2009. Replies were confidential.C S F I / New York CSFI
About this survey
This survey describes the risks currently facing the global banking industry.uk
. The questionnaire (reproduced in the Appendix) was in three parts. as seen by a wide range of bankers. both by severity and whether they were rising. In the first. The breakdown of respondent by type was:
Regulators 6% Observers 32% Bankers 62%
The responses by country were as follows:
Australia Austria Bahrain Belgium Bermuda Brazil Canada Cayman Is. or Banana Skins. Denmark Finland France GCC Germany Gibraltar 11 5 1 3 2 1 16 1 1 9 1 10 1 1 17 1 Greece Guernsey Hong Kong Hungary India Ireland Italy Japan Jersey Kazakhstan Kenya Luxembourg Malta Mauritius Multinational Netherlands New Zealand 8 2 2 3 12 4 2 4 6 5 1 9 1 1 4 7 4 Philippines Poland Qatar Romania Russia Serbia Singapore Slovakia South Africa Spain Sweden Switzerland Thailand UK Ukraine US 2 7 1 13 31 1 6 1 6 2 13 17 1 156 1 29
CSFI / New York CSFI E-mail: info@csfi. but respondents could choose to be named. In the third.
org. notable decline is risk associated with hedge funds (down from No. are shared 28 by bankers andand non-bankers alike. a a 10 development which respondents to to 11 development which respondents thisthis survey find be be the greatest 12 survey find to to the greatest source of riskrisk now facing the banking 13 source of now facing the banking sector. 5) has has slipped from the top position it occupiedthe the Although liquidity risk (No. is seen to be easing. where the the outlookseen to be for for further losses the the true cost the the crisis is where outlook is is seen to be further losses as as true cost of of crisis is counted.from an an 23 much regulation (No.No. Concern has also eased about the outlook for interest prospects the US dollar. Another in an environment of dramatic monetary easing. 14): although a sharp riserates may be imminent rates (down from 9 to to 14): although a sharp rise in in rates may be imminent in an environment of dramatic monetary easing. 29 TheThe dominant factor shaping risk 30 dominant factor shaping risk
perceptions is the the state the the world perceptions is state of of world economy.No. andand are shared 27 major banking regions. 10). counted. 9No. viewing the the recent signsrecovery as fragile andand vulnerable to broadly pessimistic. 2) 2) further shocks. it creates moral hazard. Concern has also eased about the outlook for interest rates (down from No. it creates moral hazard. 14 15 As As risk. bankers. This accounts the high position occupied by by credit risk (No. 4) were broadly pessimistic. 9) equities (No. andand 19 judgment. but but has has left the banking 9 system. politicised. it it left the banking industry industry deeply deeply politicised.uk
. regulators regulators andand close close observers of the the banking scene 49 49 observers of banking scene in in countries. political interference 16 (making its its first appearance as a (making first appearance as a Banana Skin thisthis year) has many 17 Banana Skin year) has many angles: it itdistorts commercial angles: distorts commercial 18 judgment. Closely linked is the the risk of 22 removed. political interference a a risk. to No. viewing recent signs of of recovery as fragile vulnerable to further shocks. findings are based on responses from more than 400400 responses from more than bankers. 4) were economy. andand the lagging effectthe the recession takestoll toll borrowers. countries. to No. Closely linked is risk of too too much regulation (No. 5) slipped from the top position it occupied in in last last surveymid-2008. TheThe findings are based on markets.uk Web: www. it remains a high level concern. 7). Although liquidity risk (No. Tension in other financial markets. Another notable decline is the the risk associated with hedge funds (down from No. over-reaction to crisis. Respondents’ comments about macro-economic trends (No. the lagging effect of of recession takes its its on on borrowers.C S F I / New York CSFI
This report describes the the risk outlook This report describes risk outlook for for the banking industrythe the turn of the banking industry at at turn of the the year 2010 – a time of year 2010 – a time of unprecedented stress in the the financial unprecedented stress in financial markets. notably in derivatives (No. 11) with attention focusing particularly the the currency from No. credit spreads (No. credit markets. One market where risk is seen to to be rising currency (up (up from No. One market where risk is seenbe rising is is spreads (No.
Banking Banana Skins 2010 Banking Banana Skins 2010
(2008 ranking in brackets) (2008 ranking in brackets)
Political interference (-) (-) 1 Political interference 2 Credit (2) Credit risk risk (2) TooToo much regulation (8) 3 much regulation (8) Macro-economic trends (5) (5) 4 Macro-economic trends Liquidity (1) (1) 5 Liquidity Capital availability (-) (-) 6 Capital availability Derivatives (4) (4) 7 Derivatives Risk management quality (6) (6) 8 Risk management quality Credit spreads (3) (3) 9 Credit spreads Equities (7) 10 Equities (7) Currencies (13) 11 Currencies (13) Corporate governance (16) 12 Corporate governance (16) Commodities (12) 13 Commodities (12) Interest rates (9) 14 Interest rates (9) Fraud (11) 15 Fraud (11) Management incentives (17) 16 Management incentives (17) Emerging markets (18) 17 Emerging markets (18) High dependence on on technology 18 High dependence technology (15)(15) Hedge funds (10) 19 Hedge funds (10) Rogue trader (14) 20 Rogue trader (14) Business continuation (23) 21 Business continuation (23) Retail sales practices (20) 22 Retail sales practices (20) Conflicts of interest (21) 23 Conflicts of interest (21) Back office (19) 24 Back office (19) Environmental risk (25) 25 Environmental risk (25) Payment systems (27) 26 Payment systems (27) Money laundering (24) 27 Money laundering (24) Merger mania (28) 28 Merger mania (28) Too little regulation (29) 29 Too little regulation (29) Competition from new entrants (30) 30 Competition from new entrants (30)
The biggest The biggest Banana Skin is is Banana Skin political political interference interference
Pessimism about Pessimism about the global the global economic economic outlook outlook
1 2 3 4 5 6 TheThe dash by governments rescue dash by governments to to rescue 7 their banks from the the financial crisis their banks from financial crisis may have staved off off a collapsethe the 8 may have staved a collapse of of system. Respondents’ comments about macro-economic trends (No. 13 13 to 11) with attention focusing particularly on on prospects for for the US dollar. sector. however. Tension in other financial survey in in mid-2008.org. notably in derivatives (No. 24 25 What is striking about these Banana What is striking about these Banana Skins is thatthat they are common all all 26 Skins is they are common to to major banking regions. 10 10 to
CSFI / New York CSFI E-mail: info@csfi. by bankers non-bankers alike. This accounts for for the high position occupied credit risk (No. 3) 3) from over-reaction to the the crisis.csfi. it raises uncertainty about how andand 20 it raises uncertainty about how when financial support willwill be 21 when financial support be removed. however. 10). is very predictable. is seen to be easing. 9) andand equities (No.No. it isitalsoalso very predictable.No. 7). it remains a high level concern.
to No. it generated much comment from respondents about dangers of weakened bankbank competition greater complacency due to government dangers of weakened competition and and greater complacency due to government bail-outs and higher regulatory entry barriers. No. 28). Many the the institutions seems to be easing (down No. it generated much comment from respondents about the the facing the the industry. interest rates: markets getting backback to Credit spreads. of which ranking of these is closely linked to the the number of recent incidents. Concern about the the Some of the facing banks are are to to be self-generated. was was seen tothe leastleast of the Although competition from entrants (No. Capital availability: hugehuge demands. However the ranking of these risksrisks is closely linked to number of recent incidents. there was a notable decline in concern about fraud On the operational front.uk
. remain a a sharply (from 16 16 to 12). Corporate governance: will banks learn lessons fromfromcrisis? Corporate governance: will banks learn lessons the the crisis? Currencies: worries about US dollar volatility. of which there havehave been few (Madoff being strictly a bankbank fraud). 23). No. and management incentives (No. However the despite experience which that both risks rise in recession. were seen to be small. payment systems and business continuation – all– all of which once in the back office.
‘Green risks’ ‘Green risks’ are seen to be be are seen to small despite small despite climate change climate change
On the operational risk risk front. learnt lessons from the crisis and are too eager to get to business as usual. There also also been a fall featured as Banana Skins – have eased considerably. Concern about conflicts of interest within financial institutions seems to be easing (down fromfrom No. 25) 25) unchanged despite the the generated by the the Copenhagen Summit. be less threatening to financial stability than the the banks themselves. office: has has stood up well in the crisis. as as bail-outs and higher regulatory entry barriers. Many of of responses in the governance area area were tinged with worry that that banks have not responses in the governance were tinged with the the worry banks have not learnt lessons from the crisis and are too eager to get backback to business as usual. and management incentives (No. Making its first first appearance in Banana Skins series. (No. interest rates: markets getting to normal. 30) 30) seen to be be the of the risksrisks facing industry. The The prospectsstructural change. creates moral hazard. Fraud and rogue trader: fewer incidents thanthan might be expected crisis period. Concern about conflicts of interest within financial excessive risk-taking.csfi. offload stakes in the the medium term. was was unchanged despiteheat heat generated byCopenhagen Summit.org. 20) (down No. No. though opinion is divided between bankers consider the the to be outside interference and and non-bankers who see bad incentives encouraging be outside interference non-bankers who see bad incentives encouraging excessive risk-taking. normal. investor Although there been a number of large recapitalisations in the the crisis. Too much regulation: over-reaction to the crisis. 6) is seen asarea area of high risk as banks to rebuild theirtheir balance sheets. there also be be selling pressure as governments to offload theirtheir stakes inmedium term.
The availability The availability of capital is is of capital a big worry a big worry
Political interference: distorts commercial judgment. weakening investor appetite. Concerns about risks in the back office. prospects for for structural change. weakening investor appetite. The risk of of corporate governance has has sharply (from No.
CSFI / New York CSFI E-mail: info@csfi. No. Although competition from newnew entrants (No. Liquidity: not the problem it was a ago. Currencies: worries about US dollar volatility. derivatives. Liquidity: not the problem it was a year year ago. There has has been a fall in the ranking of money laundering (down from No. to No.org. measured by the of merger mania (No. No. derivatives. creates moral hazard.to No.uk Web: www. there was a notable decline in concern about fraud (down fromfrom No. 28). the availability of capital Making its appearance in the the Banana Skins series. there will will alsoselling pressure as governments seekseek to appetite could weaken. The perception of environmental risk risk (No. 6) is seen as an an of high risk as banks try try to rebuild balance sheets. measured by the risk risk of merger mania (No. which is nownow in the ranking of money laundering (down from 24 24 to 27) 27) which is viewed as a as a reputational rather than financial risk. also alsoappreciation that that they 19) a falling off off in aggressive activity. investor appetite could weaken.(No. BackBack office: stood up well in the crisis. Capital availability: demands. Fraud and rogue trader: fewer incidents might be expected in a in a crisis period. payment systems and business continuation of which once featured highhigh as Banana Skins – have eased considerably. and the rogue trader (down from No. were seen to be small. though opinion is divided between bankers whowho consider risk risk to preoccupation. but but an an appreciation they may may be less threatening to financial stability thanbanks themselves. the availability of capital (No. No.to No. 11 11 to 15) 15) and the rogue trader (down from 14 14 to 20) despite experience which sayssays that both risks risea in a recession. Credit spreads.C S F I / New York CSFI
19) withwith a falling in theirtheir aggressive activity.to No. equities. The perception of environmental viewed reputational rather than financial risk. Political interference: distorts commercial judgment. Concerns about risks there been few (Madoff not not being strictly a fraud). The riskpoorpoor corporate governance risenrisen suffered in the two years. Concern about quality of risk risk management (No. Hedge funds: off the radar screen so far as risk is concerned. Hedge funds: off the radar screen so far as risk is concerned. equities. 21 21 to 23). 12). No. 8) 8) remains following the the disastrous losses suffered in the last last two years. No. Too much regulation: over-reaction to the crisis.
RISING RISKS RISING RISKS
BigBig movers movers
FALLING RISKS FALLING RISKS
Some of the risksrisks facing banks seenseenbe self-generated.remains highhigh following disastrous losses quality of management (No. 16) 16) remain preoccupation. Although there havehave been a number of large recapitalisations in crisis.
However the first first indications of anxiety about as stability returned to the markets. All-risk index is atis atall-time high. Although the top risk risk peaked2000. biggest dangers facing the industry. Only 9 per cent cent answered “well” 11 11 to handle the the they had had identified.poll. regulatory overkill and credit to be among the biggest dangers facing the industry.
Only 9% of of Only 9% respondents think respondents think banks are well banks are well prepared prepared to handle risk to handle risk
The Banana Skins Index The Banana Skins Index
Equity Equity mkts mkts Credit Credit risk risk Liquidity Liquidity Too much Too much Political Political regulation regulation interference interference Derivatives Derivatives
4. Insofar as there are nuances. The top top shows the the average score given to top risk risk over last last years. of all risks of all risks
CSFI / New York CSFI E-mail: info@csfi. the overall anxiety continued to rise risetwo two years in messy aftermath. This is a more per answered “poorly”. bankers and non-bankers about the main Banana Skins. The remainder gave a “mixed” reply. However the indications of anxiety about the soundness of the bull bull appeared in the 2006 survey withwith a sharp rise in the the soundness of the run run appeared in the 2006 survey a sharp rise in the All-risk index. “poorly”. All-risk index. which has continued the the present
19 98 19 19 98 99 19 20 99 00 20 20 00 01 20 20 0 01 2 20 20 02 03 20 20 03 04 20 20 04 05 20 20 0 06 5 20 20 06 07 20 20 07 08 20 20 08 10 20 10
Top risk risk Top Avg. and and non-bankers worried that that banks will to reform themselves.5Poor Poor 3 3
risk mgt mgt risk
2. This is a more negative result thanthan timetime whenper cent cent said “well” onlyonly 4 cent cent said negative result last last when 24 24 per said “well” and and 4 per per said “poorly”. The remainder gave a “mixed” reply. bankers are mainly concerned withwith political and and regulatory fall-out from the bankers are mainly concerned the the political regulatory fall-out from the crisis. Europe and and Asia-Pacific: all all in the three regions surveyed: North America.uk Web: www. We asked respondents well prepared they thought the the industry was was to handle risksrisks they identified. merely headhead straight into a new crisis.5 2 2
The Banana Skins The Banana Skins Index is at an an Index is at all-time high all-time high
The The Banana Skins Index tracks responses over time and be readread asindicator Banana Skins Index tracks responses over time and can can be as an an indicator of anxiety levels on a on a scale of 1-5. Europe the the Asia-Pacific: considered political interference. indication of the exceptional level of anxiety currently gripping the market.org. Geographically.Avg. Although the top risk risk has fallen off.uk
. The The course of index overover last decade shows the finance sector emerging in a in a course of the the index the the last decade shows the finance sector emerging bullish mood from the late 1990s but running into intofrenzy of the dot comcom crash in bullish mood from the late 1990s but running the the frenzy of the dot crash in the early 2000s. Regulators focusedthe quality of balance merely straight into a new crisis. risk level then subsided as stability returned to the markets.C S F I / New York CSFI
A break-down of responses shows an unusually highhigh levelagreement among A break-down of responses shows an unusually level of of agreement among bankers and non-bankers about the main Banana Skins. Regulators focused on on the quality of balance sheets and risk risk management. Geographically.5 3. Although the top peaked in in 2000. Preparedness. We asked respondents howhow well prepared they thought industry Preparedness. which has continued withwithpresent poll. indication of the exceptional level of anxiety currently gripping the market. the the All-risk index an an all-time high. The The risk level then subsided continued to for for years in the the messy aftermath. Only 9 per answered “well” and and per cent cent answered “poorly”.csfi.5 4.5 Score Score 4 4
3.5 2. and and bottom line line average of all the risks. The line line showsaverage score given to the the of anxiety levels scale of 1-5. and and crisis. concerns were also strikingly similar sheets and management. Insofar as there are nuances. regulatory overkill and credit risk risk to be among the considered political interference. the the bottom the the average of all the risks. top over the the 12 12 years. the overall anxiety levellevel the early 2000s. an an Although the top has fallen off. concerns were also strikingly similar in the three regions surveyed: North America. non-bankers are are worried banks will fail fail to reform themselves.org.
They also also suspect that banks from the crisis. by forcing them to lendlenda in a recession. currency. academics Observers – non-bankers.
Regulators – supervisors. by to override commercial judgment. and and skimping on theirtheir risk management. prospects. but differ onon the but differ the detail detail
Observers – non-bankers. Their concern with availability of capital. academics
1 2 3 4 5 6 7 8 9 10 Political interference 1 Political interference Macro-economic trends 2 Macro-economic trends Credit risk risk 3 Credit Too Too much regulation 4 much regulation Capital availability 5 Capital availability RiskRisk management quality 6 management quality Liquidity 7 Liquidity Credit spreads 8 Credit spreads Currencies 9 Currencies Equities 10 Equities
Non-banker respondents share the the bankers’ Non-banker respondents share bankers’ concerns about political interference. analysts. are are skimping on risk management. fearing a ‘double dip’ dip’ recession.
Bankers. liquidity and the derivatives market. in case because of the the uncertainty about how and because of uncertainty about how and when governments will will withdraw their when governments withdraw their support. Liquidity. exposed by the crisis are another concern.uk
.csfi.g. analysts. Bankers’ worries also also include a worsening credit outlook worries include a worsening credit outlook as bad bad debts continue pile pile up. Non-bankers are the mostmost pessimisticthe the Non-bankers are the pessimistic of of major respondent groups about the economic major respondent groups about the economic prospects.g.org. Bankers’ financial crisis is closely linked. credit spreads and and commodity risk currency. particularly credit default swaps. cloud the financial markets. weaknesses in bank governance exposed by the crisis are another concern. consultants. though concerns about political interference. Concern forcing them to in recession.uk Web: www. A breakdown of the top ten responses by shows different levels of concern. particularly credit default swaps.org. Their concern with liquidity risk risk and the derivatives market. The The weaknesses in bank governance support. government officials
1 2 3 4 5 6 7 8 9 10 Credit risk risk 1 Credit Political interference 2 Political interference Liquidity 3 Liquidity Currencies 4 Currencies Macro-economic trends 5 Macro-economic trends Credit spreads 6 Credit spreads Corporate governance 7 Corporate governance Commodities 8 Commodities RiskRisk management quality 9 management quality Capital availability 10 Capital availability
The The prospect another wave of bad bad debts prospect of of another wave of debts heads the concerns of regulators as recession heads the concerns of regulators as recession takes its toll on borrowers – and and uncertainties takes its toll on borrowers – uncertainties still still cloud the financial markets. Concern about a regulatory over-reaction to to the about a regulatory over-reaction the financial crisis is closely linked.
Bankers – practitioners of commercial andand investment banking Bankers – practitioners of commercial investment banking
1 2 3 4 5 6 7 8 9 10 Political interference 1 Political interference Too Too much regulation 2 much regulation Credit risk risk 3 Credit Liquidity 4 Liquidity Derivatives 5 Derivatives Macro-economic trends 6 Macro-economic trends Capital availability 7 Capital availability RiskRisk management quality 8 management quality Credit spreads 9 Credit spreads Equities 10 Equities
Bankers put political interference at the top of of Bankers put political interference at the top theirtheir risk because of the pressure it creates risk list list because of the pressure it creates to override commercial judgment. remains high. credit spreads commodity risk are all highhigh on their Regulators also also worry are all on their list. fearing a ‘double recession. Bankers. and the availability of new new capital. They suspect that banks havehave got to the bottom of theirtheir bad loans. e. consultants. Liquidity. Regulators worry about political interference. remains high. not not got to the bottom of bad loans. observers and observers and regulators agree regulators agree onon the big risks. government officials Regulators – supervisors.C S F I / New York CSFI
Who said what Who said what
A breakdown of the top ten responses by type type shows different levels of concern. though for different reasons: theythey worried about for different reasons: are are worried about the moral hazard created by bankbank rescues and the moral hazard created by rescues and wonder whether bankers havehave learnt lessons wonder whether bankers learnt lessons from the crisis. and the as debts continue to to up. list.
CSFI / New York CSFI E-mail: info@csfi. the big risks. e. in theirtheir case about political interference.
where many respondents were located.
Asia Pacific Asia Pacific
1 2 3 4 5 6 7 8 9 10 Too Too much regulation 1 much regulation Macro-economic trends 2 Macro-economic trends Credit risk risk 3 Credit Political interference 4 Political interference Currencies 5 Currencies Commodities 6 Commodities Liquidity 7 Liquidity HighHigh dependence on tech.risk. about the threat of regulatory over-reaction. US. Canadian banks more concerned the Canadian banks are are more concerned about the threat of regulatory over-reaction.csfi. notably in the US. notably inUK where there is a is a banks. region also focused on the risksrisks of fraud and banking focused on the of fraud and the the banking system’s highhigh technological dependence. liquidity. and the shaky prospects for liquidity and the shaky prospects for economic recovery.org. Europe. Linked to this this is fear of a regulatory located. liquidity. about regulatory over-reaction to crisis. South EastEast Asia and India – a Australasia.org. notably in the the UK where there lot of it. withwith many respondents worried pessimistic. and the the credit derivative markets. Australasia. that the recovery be long and and difficult. Other over-reaction.uk
. and and where many respondents were lot of it. The The economic mood is derivative markets. mainly because of of aof a ‘bubble’ the tigertiger economies and a ‘bubble’ in in the economies and a collapse of the credit markets. Derivatives 9 Derivatives Fraud 10 Fraud
Respondents from this this region included Japan.risk. The The immediate concerns in both countries are immediate concerns in both countries are veryvery much with crisis fall-out: credit and much with crisis fall-out: credit and liquidity risk. and pessimism about the economic outlook. The response is notable for the strength of concern response is notable for the strength of concern about regulatory over-reaction to the the crisis. many respondents worried that the recovery will will be long difficult.
CSFI / New York CSFI E-mail: info@csfi. economic mood is pessimistic. Respondents from region included Japan. The broad group exposed variety of risks. and pessimism about particularly in Australia. South Asia and India – a broad group exposed to a to a variety of risks. There was was less concern economic recovery. mainly because of fearsfears the economic outlook. 8 dependence on tech. particularly in Australia. system’s technological dependence. and credit credit capital. notably in the list of in North America. Linked to is fear of a regulatory over-reaction. capital. particularly by Brussels. Other top top concerns focus crisis-related issues: concerns focus on on crisis-related issues: credit risk.C S F I / New York CSFI
North America North America
1 2 3 4 5 6 7 8 9 10 Political interference 1 Political interference Credit risk risk 2 Credit Too Too much regulation 3 much regulation Liquidity 4 Liquidity Macro-economic trends 5 Macro-economic trends RiskRisk management quality 6 management quality Corporate governance 7 Corporate governance Derivatives 8 Derivatives Credit spreads 9 Credit spreads Capital availability 10 Capital availability
Government intrusion into intobanking system Government intrusion the the banking system through bail-outs and and official support heads through bail-outs official support heads the list of risksrisks in North America.uk Web: www.
Risks are Risks are similar across similar across the major the major regions regions
1 2 3 4 5 6 7 8 9 10 Political interference 1 Political interference Credit risk risk 2 Credit Macro-economic trends 3 Macro-economic trends Too Too much regulation 4 much regulation Capital availability 5 Capital availability Liquidity 6 Liquidity RiskRisk management quality 7 management quality Credit spreads 8 Credit spreads Derivatives 9 Derivatives Equities 10 Equities
Europe is also also deeply concerned about the Europe is deeply concerned about the consequences of government involvement consequences of government involvement withwith banks. particularly by Brussels. There less concern about the the availability capital thanthan in about availability of of capital in Europe. The The region also collapse of the credit markets.
again possibly driven by the the fraud is notable. high place taken by fraud is notable. Recapitalisation could problem. and and ensuing regulatory crackdown.csfi. for example in Russia to be particularly high. There is caution about the economic problem. despite recent improvements. outlook. economic downturn. risksrisks in macro-economic outlook are seenseen in the the macro-economic outlook are to be particularly high. most pressing risks for the banks remain on the credit front. concern about political up. again possibly driven by economic downturn. in the the EastEast where ‘bubbles’ feared to be building where ‘bubbles’ are are feared to be building up.uk
. the possibility of another wave of bad bad debts. for example in Russia where the economy is fragile. The The most pressing risks for banking system. and continuing liquidity difficulties. which is widely seenseen as potentially damaging to the is widely as potentially damaging to the banking system. which the the ensuing regulatory crackdown. Recapitalisation could be abe a improvements.
Emerging economies Emerging economies
1 2 3 4 5 6 7 8 9 10 Credit risk risk 1 Credit Credit spreads 2 Credit spreads Macro-economic trends 3 Macro-economic trends Currencies 4 Currencies RiskRisk management quality 5 management quality Fraud 6 Fraud Political interference 7 Political interference Equities 8 Equities Too Too much regulation 9 much regulation Capital availability 10 Capital availability
The The concerns in the emerging world are are top top concerns in the emerging world all linked to financial pressures arising from all linked to financial pressures arising from the crisis: bad loans and difficult markets.C S F I / New York CSFI
Industrial countries Industrial countries
1 2 3 4 5 6 7 8 9 10 Political interference 1 Political interference Too Too much regulation 2 much regulation Liquidity 3 Liquidity Credit risk risk 4 Credit Macro-economic trends 5 Macro-economic trends Capital availability 6 Capital availability RiskRisk management quality 7 management quality Credit spreads 8 Credit spreads Corporate governance 9 Corporate governance Derivatives 10 Derivatives
Industrial and Industrial and emerging emerging economies have economies have different concerns different concerns
The The concerns of industrial countries centre on concerns of industrial countries centre on the the political fall-out from the crisis: the political fall-out from the crisis: the impact of government ownership and support. impact of government ownership and support. and possibility of another wave of debts. and and in Far Far where the economy is fragile.
CSFI / New York CSFI E-mail: firstname.lastname@example.org Web: www. concern about political and and regulatory pressures lower thanthan in regulatory pressures is is lower in industrial countries.org. There is caution about the economic outlook. On the other hand. The The the crisis: bad loans and difficult markets. despite recent continuing liquidity difficulties. withwith the the banks remain on the credit front. On the other hand. The The high place taken by industrial countries.org.
conducted at the height of the crisis. instruments
1 2 3 4 5 6 7 8 9 10
Credit risk Macro-economy Equity markets Complex financial instruments Business continuation Domestic regulation Insurance Emerging markets Banking market over-capacity International regulation
1 2 3 4 5 6 7 8 9 10
Complex financial instruments Credit risk Macro economy Insurance Business continuation International regulation Equity markets Corporate governance Interest rates Political shocks
1 2 3 4 5 6 7 8 9 10
Too much regulation Credit risk Corporate governance Derivatives Hedge funds Fraud Currencies High dependence on tech. Banking market o’-capacity Merger mania Economy overheating Comp from new entrants Complex fin. dramatic developments such as EMU. Hedge funds Corporate governance Emerging markets Risk management
1 2 3 4 5 6 7 8 9 10
Liquidity Credit risk Credit spreads Derivatives Macro-economic trends Risk management Equities Too much regulation Interest rates Hedge funds
1 2 3 4 5 6 7 8 9 10
Political interference Credit risk Too much regulation Macro-economic trends Liquidity Capital availability Derivatives Risk management quality Credit spreads Equities
Some Banana Skins come and go. Risk management Macro-economic trends
1 2 3 4 5 6 7 8 9 10
Too much regulation Credit risk Derivatives Commodities Interest rates High dependence on tech. The period after 2000 also saw the rise of newfangled risks such as derivatives and hedge funds. Many of these faded. The Top Ten since 1996 show how concerns have changed over more than a decade. The 1990s were dominated by strategic issues: new types of competition and technologies. The 2008 survey. the Internet and Y2K.C S F I / New York CSFI
Banana Skins: The Top Ten 1996-2010
1 2 3 4 5 6 7 8 9 10 Poor management EMU turbulence Rogue trader Excessive competition Bad lending Emerging markets Fraud Derivatives New products Technology foul-up
1 2 3 4 5 6 7 8 9 10
Poor risk management Y2K Poor strategy EMU turbulence Regulation Emerging markets New entrants Cross-border competition Product mis-pricing Grasp of technology
1 2 3 4 5 6 7 8 9 10
Equity market crash E-commerce Asset quality Grasp of new technology High dependence on tech.uk
. brought the focus sharply onto credit and market risks. some are hardy perennials. and propelled two new entrants to the top of the charts: liquidity and credit spreads.org. to be replaced by economic and political risks and particularly by concern over the growth of regulation.org.
CSFI / New York CSFI E-mail: email@example.com. the latter making their first appearance in 2005. This year’s survey shows a preoccupation with the crash aftermath: lingering debt and funding problems.uk Web: www. but also looming questions about the state of the world economy and the intrusion of government into the banking sector.
way”. concern about it is strong and widespread. Having bailed banks out. crisis deeper any any of us seen”. They also also know that governments need bank share pricesstay stay strong in case. Several respondents raised the additional worry that that there wasmoney leverage”. of whom said said that “premature withdrawal government support could leave of whom that “premature withdrawal of of government support could leave weaker banks unable to finance theirtheir assetsaon a sustainable basis given their high weaker banks unable to finance assets on sustainable basis given their high leverage”.org. Political interference on this this scale being rare. One can't lend financial sector is almost universally contradictory negative. A senior risk officer at a large US left to banks out out new round of failures. Europe and North America. But But concern about it is strong and widespread. it never before appeared in 15 15 Political interference on scale being rare. a policy adviser at at the London School Economics. Having bailed the the banks out. no company will be ‘too to fail’ fail’ . to extricate itself fromfrom such support and raise capitalaon a standsystem in general. the risk profile of the system”. not decrease. A respondent from Ireland.org. gives them the one-way order to offload taxpayer stakes in future which. one one future of government intervention is also a crucial question for for regulators. where the government is deeply involved. it came top of of the list Europe and North America. A credit more to support the economy and build up capital bases at the same time”. A director at a at a large UK bank said that “political meddling in the better judgment.uk Web: www. which will will probably regulation is likely to to mis-allocation of of resources. the risk profile of the system”. The The remaining concern is mostly around disengagement process of of intervention. The The ability of individual banks. Concern into three areas. Ros Ros Altmann. but it left the the banking industry deeply politicised. against theirtheir governments are pushing them to lending through the the recession. and No. remaining concern is mostly around the the disengagement process governments from theirtheir intervention. and it includes bankers well well non-bankers. finance sector. A credit analyst at a large Japanese bank said said that “political interference in both banking and analyst at a large Japanese bank that “political interference in both banking and regulation is likely to lead leada to a mis-allocationresources. Geographically. not decrease. and No. but but not suffering penalties of of option of reaping the rewards of risk-taking. a a collapse of the system. that banks now assumed that they cannot fail fail “which distorts operational decisions and and permits different behaviour than would otherwisethe the operational decisions permits different behaviour than would otherwise be be case. and whether this would occuran orderly governments from intervention. eveneven regulators. One can't lend more to support the economy and build up capital bases at the same time”. Altmann. where the government is deeply involved. A senior risk officer at a large US bankbank said that “should ‘green shoots’ prove false. but it has has left banking industry deeply politicised. increase. One One ismoral hazard created by bankbank rescues. A director large UK bank said that “political meddling in the financial sector is almost universally contradictory and and negative. The The second the the politicisation lending.which could create a crisis deeper thanthan of us havehave seen”.
Political meddling Political meddling in banking is is in banking invariably invariably ‘negative’ ‘negative’
Concern falls falls into three areas. The The third concernhowhow governments will withdraw their support without third concern is is governments will withdraw their support without upsetting the banking system and and jeopardising recovery. chief risk officer of a large South African bank said: “The main immediate concerns havehave been alleviated through government “The main immediate concerns been alleviated through government intervention. not suffering the the penalties failure”. The The future of government intervention is also a crucial question regulators.which could create a exhausted resources. Several respondents raised the additional worry there was no no money left to bail bail banks of a of a new round of failures. gives them the one-way option of reaping the rewards of risk-taking. regulators.csfi. A respondent from upsetting the banking system jeopardising the the recovery. Geographically. said:said: “Currently system is is Ireland. which probably increase. said said that banks now assumed that they cannot “which distorts theirtheir Economics. again. The The chief risk officer of a large South African bank said: alone basis is an issue”. “Currently the the system extensively supported by individual states.
CSFI / New York CSFI E-mail: info@csfi. a policy adviserthe London School of of always be bailed out”. development which is seenseenour respondents to be the greatest risk risk now facing the development which is by by our respondents to be the greatest now facing the finance sector. and the extensively supported by individual states. and the system in general. 1. ability of individual banks. governments are pushing them to keepkeep lending through recession. Political interference (-) Political interference (-)
The The dashgovernments to rescue theirtheir banks from disaster may have stavedaoff a dash by by governments to rescue banks from disaster may have staved off collapse of the system. and and these countries have said that “should the the ‘green shoots’ prove false.C S F I / New York CSFI
1. it came top the list in in as as non-bankers. no company will be ‘too big big to . against better judgment. to extricate itself such support and raise capital on standalone basis is an issue”.uk
. They know that governments need bank share prices to to strong in order to offload taxpayer stakes in future which. again. The managing director of risk at a large US bankbank said that it had already begun to breed complacent attitudes: “We'll large US said that it had already begun to breed complacent attitudes: “We'll always be bailed out”. second is is politicisation of of lending. it has has never before appeared in years of Banana Skins surveys (though “political shocks” suchsuchrevolutions and and years of Banana Skins surveys (though “political shocks” as as revolutions warswars have). the the Pacific region. and whether this would occur in in an orderly way”. failure”. and it includes bankers as as have). The managing director of risk at a is the the moral hazard created by rescues. 4 in 4 inAsiaAsia Pacific region. these countries have exhausted theirtheir resources.
relations with governments the public if they wanted to to expunge political risk.” Concerns focused particularly on real estate. director-general of UK’s Building Societies Association. I do not not believe that they have peaked. real economy or or taxpayer. On the home loan front. Adrian Coles. for for the politicisation banking: the the need rescue There reason.” – Former regulator. 1 loan problems always the recovery and could still increase. US US bank analyst Ray Soifer Many respondents that the worst was yet to to come. Many respondents said that banks would have repair their runs course.No.
The worst yet The worst yet to to come come onon credit? credit?
Many respondents felt felt that the worst was yetcome. and because banks have not got to to bottom of of their existing their debts. a a diminishing ability on part of mortgage lenders to exercise significant forbearance policies”. but but the political climate made hard for for them foreclose.” while from Ireland. outs”. chairman.” – Former regulator. This was the No. and credit losses are a a lagging indicator. risk waswas seenbe most severe in the the Asia Pacific region becauseasset bubbles. course.
A legacy of of A legacy mistrust mistrust
2. mortgage lenders to exercise significant forbearance policies”. Another area of concern is consumer credit – credit cards andand car loans – where Another area of concern is consumer credit – credit cards car loans – where bankers saidsaid that bad debts “had not bottomed out yet”.org. a respondent wrote: “A real concern credit remains high. credit riskrisk remains high. respondent from the the US said that rising unemployment was harbinger of of respondent from US said that rising unemployment was a a harbinger potentially huge losses on property lending. their behaviour seems to have changed not notall. head of of strategy the the Royal Bank Scotland.” – City trader. Here is a is a selectioncomments on thisthis theme. Here selection of of comments on theme.” – City lawyer. particularly commercial property lending leveraged buyouts”.csfi. bank analyst Ray Soifer said: “The economy is not not yet out the the woods. their behaviour seems to have changed at at The result is likely to be a period of tension between banks andand regulators. the political climate made it it hard them to to foreclose. several only surviving due to to interest rates”. Royal Bank of of Scotland. several respondents could see see banks facingdilemma as borrowers defaulted on on their respondents could banks facing a a dilemma as borrowers defaulted their mortgages. A Nordic regulator saidsaid that “companies potentially huge losses on property lending.” – City trader.” – City lawyer. “The financial sector as aas a lobby groupnot not aligned with the interests of “The financial sector lobby group is is aligned with the interests of the the real economythe the taxpayer. Geographically. Adrian mortgages. that “the economic outlook still looks miserable. the the risk for regulators. There is also the question of bankers that bad debts “had not bottomed out yet”.” while from Ireland. Geographically. A UKUK regulator saw “continuing economic weakness affecting highly service.2. Bankers and observers put it at at 3. This was the No. business. of of course. Many respondents said that banks would have to to repair their relations with governments andand the public if they wantedexpunge political risk.org. “We need to get get backbusiness without government support. 1 riskrisk for regulators. seen to to be most severe in Asia Pacific region because of of asset bubbles. As result. saw a squeeze between “rising unemployment in 2010. a respondent wrote: “A real concern would be the the impact bank balance sheets of aof a ‘double dip’the the euro/worldwide would be impact on on bank balance sheets ‘double dip’ in in euro/worldwide economies. which means that to be a period of tension between banks regulators. A Nordic regulator that “companies are are only surviving due lowlow interest rates”.
CSFI / New York CSFI E-mail: info@csfi. saw a squeeze Coles. A A Concerns focused particularly on real estate. As a a “The banks fail to to realise depth of of public anger against them.” Chris Pettit.” Chris Pettit. Credit risk (2) Credit risk (2)
TheThe risklarge credit losses remains a top-level Banana Skin because of fears thatthat risk of of large credit losses remains a top-level Banana Skin because of fears thatthat banks have not gotthe the bottomtheir existing their badbad debts.” economies. particularly commercial property lending andand leveraged buyleveraged borrowers. “Banks justjust don’t get how unpopular they are and how much has to “Banks don’t get how unpopular they are and how much has to change. This will leave a political legacy matter how the the crisis banks in first place. The result is likely result. saidsaid that “the economic outlook still looks miserable. director-general of the the UK’s Building Societies Association. “The banks stillstill failrealise the the depthpublic anger against them.uk
. head strategy at at indicator. which means that banks concentrate on politics to the the detriment their ordinary banking banks concentrate on politics to detriment of of their ordinary banking business. change.C S F I / New York CSFI
There is ais a reason. This will leave a political legacy no no matter how crisis runs its its course. andanddiminishing ability on the the part of between “rising unemployment in 2010.” – UK UK bank “We need to back to to business without government support. commercial as well as domestic. I do believe that they have peaked. commercial as well as domestic. Bankers and observers put itNo. all. There is also the question of leverage: pastpast deals built large amounts of debt which investors cannot now leverage: deals built on on large amounts of debt which investors cannot now service. A regulator saw “continuing economic weakness affecting highly leveraged borrowers.” – bank chairman.uk Web: www. 3. and because loan problems always lag lag the recovery and could still increase. and credit losses arelagging said: “The economy is yet out of of woods. the politicisation of of banking: need to to rescue banks in the the first place. On the home loan front.
who ranked it No. A respondent from a Middle East bank that “European banks. banks which managed to to make it through crisis unscathed. Many respondents described it dangerous over-reaction which could endend damaging not not just the banks but the wider economy. Chief among them waswas that the regulatory crackdown was politically driven and therefore likely them that the regulatory crackdown was politically driven and therefore likely to be be overdone. head of of group compliance at Nordea Sweden. “Failure to admit the the extentthe the write-downs that mark to to market accounting. which was likely to to be particularly heavyhanded andand politically driven. saidsaid that the EU’s new regulatory proposals had not been properly Sweden. however well intentioned. The chairman of of a large bank was said his worry was “overbearing regulation which is not not proportionate of a level playing field “overbearing regulation which is proportionate or or of a level playing field character”.uk
. Regulators took different view: they thought the the problem was too little rather than too much different view: they thought problem was too little rather than too much regulation.uk Web: www. 4. which was likely be particularly heavyrespondents the EU’s response.No. no. Many respondents made point that the risk lay in in politicians regulators going for for quantity rather than quality. The chairman a large UKUK bank was said his worry was to overdone. Peter Moffatt of the the Guernsey Financial Services Commission was or stalls”. Sonja Lohse. also among observers of the the banking industry who putat No. audit committee of Daiwa Securities. Too much regulation (8) Too much regulation (8)
TheThe torrentnew regulation being proposed in the the wakethe the crisis. Chief among Respondents gave many reasons their concerns about regulation. a respondent from a major banking trade association this was a particular issue in the the eurozone where. “Failure to admit extent of of write-downs that are are necessary will prolong the periodinstability in both the the system and for some necessary will prolong the period of of instability in both system and for some individual eurozone banks”. I am am much more sceptical that their loan books are.3. The chief auditor a large regulators going quantity rather than quality. saidsaid that “while mark-toEurope. 2. A particular concern for European respondents waswas the EU’s response. unlike the US and the UK. Even if the upturn continues the answer to to both questions it will manifest itself number of no. Middle Eastern banks in in particular Dubai banks in in denial about their exposures. The chief auditor of of a large Canadian bank saidsaid regulators took the view that “more work equals more control.but but also This concern particularly strong among bankers. and that could well become a source of pressure if the the rateeconomic recovery diminishes could well become a source of pressure if rate of of economic recovery diminishes or stalls”. banks tenduse use particular issue in eurozone where. Peter Moffatt of Guernsey Financial Services Commission was concerned about “unexpected lossloss duemispricing/misunderstanding of assets on on concerned about “unexpected due to to mispricing/misunderstanding of assets banks’ balance sheets (or clients’ balance sheets)”. Even if the upturn continues felt felt the answer both questions waswas beast. Geographically. 2.csfi.org.org. audit committee of Daiwa Securities. Regulators took a a among observers of banking industry who put it it at 4. banks’ balance sheets (or clients’ balance sheets)”.
CSFI / New York CSFI E-mail: info@csfi. is seen as potentially weakening banking industry rather than strengthening it. Sonja Lohse. banks tend to to lessless markmarket accounting. different ways.C S F I / New York CSFI
TheThe other major area concern is is other major area of of concern asset valuation: are are banks on top of A subtle beast asset valuation: banks on top of A subtle beast their exposures. Canadian bank regulators took the view that “more work equals more control.
3. could up up damaging just the banks but the wider economy. andand could “squeeze out flexibility from the markets” and damage the few evaluated. andand have they valued their exposures. in Asia Pacific. and that realistically valued. Richard Farrant. who ranked it No. when they need intelligent risk-based regulation”. a respondent from a major banking trade association saidsaid this was a Geographically. for about years”. that the EU’s new regulatory proposals had not been properly evaluated. Europe. Many respondents made the the point that the risk lay politicians andand character”. chairman the the it will manifest itself in a in a number of Richard Farrant. All All geographical regions gave this Banana Skin a high score: it came top regulation. A respondent from a Middle East bank saidsaid that individual eurozone banks”. Middle Eastern banks andandparticular Dubai banks are aredenial “European banks. have they valued them realistically? Many respondents them realistically? Many respondents Credit risk risk is a complex and subtle Credit is a complex and subtle beast. unlike the US and the UK. chairman of of different ways. that “while mark-toUK banking consultant market means thatthat banks' trading UK banking consultant market means banks' trading portfolios are are probably reasonably portfolios probably reasonably realistically valued. which could very well set back Europe andand the Middle East about their exposures. geographical regions gave this Banana Skin a high score: it came top in Asia Pacific. A particular concern for European when they need intelligent risk-based regulation”. Many respondents described it as aas a dangerous over-reaction which strengthening it. is seen as potentially weakening the the banking industry rather than intentioned. headgroup compliance at Nordea in in handed politically driven. Respondents gave many reasons for for their concerns about regulation. however well torrent of of new regulation being proposed in wake of of crisis. I much more sceptical that their loan books are. could “squeeze out flexibility from the markets” and damage the few banks which hadhad managedmake it through the the crisis unscathed.
Excessive Excessive regulation may regulation may weaken rather weaken rather than strengthen than strengthen the banks the banks
This concern waswas particularly strong among bankers. which could very well set back Europe the Middle East for about fivefive years”.
pushing this Banana Skin a a economic outlook remains extremely uncertain. chief operational officer of of Commonwealth Bank. from the pointview of of sheer volume of of new regulation also a concern. a partnerlawlaw firm DLA Piper and management distraction. Michael Lesser. chief risk officer of large German bank warned that pressure from politicians andand regulators “could lead overregulation of banks. Asia Pacific (No. UK banking leader at PricewaterhouseCoopers. Most of our our respondents sounded very pessimistic. 1the the Asia Pacific region. a partner at at firm DLA Piper saidsaid that “there has be a limit to how much change a financial institution can can that “there has to to be a limit to how much change a financial institution safely take on board at oneone time”. but riskier inadvertently encouraging firms to involved in in other. For many. However. investment. consultation and analysis of overall impact on the the individual banksthe the financial sectors”. unprepared for Broadly. America (No. suffer a setback. TheThe chief risk officer aof a large German bank warned that pressure profitability”. John Hitchins. saidsaid that “the cumulative effect all the the regulatory at PricewaterhouseCoopers. andand could lead turnturn ato a further reduce banks’ willingness to take further risks.” business models. but riskier business. more pessimistic than either Europe (No. consultation and of of a regulatory overreaction “without necessary review. A banker from India commented: “The current crisis has has ledall types of banks failing. This may from politicians regulators “could lead to to overregulation of banks. managing director of supervision andand authorisationQatar. lessless restricted. While our
CSFI / New York CSFI E-mail: firstname.lastname@example.org. UK banking leader banks with expensive capital liquidity rules. If there consensus. risk of of excessive regulation No. restricted. a a continuing shortage of credit.uk
. Michael Lesser. Most of respondents sounded very pessimistic. which be unpopular. blind these dangers. For many.” Regulators were not. to to avoid either overly restricting the the ability of banks to do business or by restricting some business lines. but but that bankers will be simply that there will be be a “double dip” recession. 3) or North 6). mounting pressures on government in debts. from the point of of view costcost and management distraction. This may reduce banks’ willingness to take further risks. TheThe chief investment officer aat a large UK investment group said: believe the the chief investment officer at large UK investment group said: “I “I believe actions of the the authorities guarantee depositors have significantly reduced the the actions of authorities to to guarantee depositors have significantly reduced likelihood of aof a systemic wide collapse. wrote: “Regulators (and I one) need to be careful about how new rules are are written. works. chief operational riskrisk officer the the Commonwealth Bank.not. Tougher regulation may also have unintended safely take on board at time”. wrote: “Regulators (and I am am one) director of supervision authorisation in in Qatar. higher costs will have to to be passed on to consumers. the danger is not not simply that there will a “double dip” recession. However. blind to to these dangers. Tougher regulation may also have unintended consequences. or or even collapse deflation. 5). Macro-economic trends (5) Macro-economic trends (5)
Fears of of a Fears a ‘double dip’ ‘double dip’ recession recession
TheThe economic outlook remains extremely uncertain. TheThe impact profitability could alsoalso spur bankstake more riskrisk or be unpopular. Michael McKee.org. The question whether the the global resources. Broadly. 2 versus 6). that bankers will be unprepared for it. suffer a setback. In In Australia. however. saw the riskrisk a regulatory overreaction “without the the necessary review. mounting pressures on government resources. John Hitchins. As we come out outthisthis crisis the main threatsafety willwill be liquidity management. retail. it. wavering investor confidence. A banker analysis of overall impact on individual banks or or financial sectors”. Gary Dingley. While not not our economy with a further leg down in in 2010 remains significant. large from India commented: “The current crisis led to to all types of banks failing. The question is is whether global economy willwill somehow struggle on. managing Regulators were however. 2) 2) more pessimistic than either Europe (No.org. TheThe higher costs will havebe passed on to consumers. inadvertently encouraging firms to get get involvedother. could lead in in to further contraction of the the economy”. non-bankers seem to be more pessimistic than bankers (No. retail.continuing shortage of credit. TheThe sheer volumenew regulation waswas also a concern.csfi. 3) or North America (No.”
Too much Too much regulation regulation could stifle the could stifle the recovery recovery
4. 5). pushing this Banana Skin up up notch. 2 versus No. contraction of economy”. sustained only by lowlow interest rates and massive fiscal and monetary support. andand wavering investor confidence. the possibility aof a ‘W’ path for likelihood systemic wide collapse. Michael McKee.Australia. 1 in in Asia Pacific region. non-bankers seem to be more pessimistic than bankers (No. the the works. impact on on profitability could spur banks to to take more or abscond to more lightly regulated centres.isIt is sustained only by interest rates and massive fiscal and monetary support. Largely the common denominator is is poor liquidity management. the possibility of ‘W’ path for the the economy with a further leg down 2010 remains significant.No. Largely the common denominator poor small.C S F I / New York CSFI
There waswas also the fear that regulation would stifle the recovery loading the the There also the fear that regulation would stifle the recovery by by loading banks with expensive capital andand liquidity rules. which willwill consequences. it is that the current recovery is very weak. ability of banks to do business or by restricting some business lines. saw the Gary Dingley.avoid either overly restricting need to be careful about how new rules written.” business. TheThe riskexcessive regulation waswas No. large small. the danger is notch. abscond to more lightly regulated centres. It alsoalso vulnerableato a reversal caused fresh problems on the the banking front: a surge vulnerable to reversal caused by by fresh problems on banking front: a surge in badbad debts.even collapse intointo deflation. As we come of of crisis the main threat to to safety be over-reaction from regulators which leads to ato a too costly system and unsustainable over-reaction from regulators which leads too costly system and unsustainable business models. it is that the current recovery is very weak. If there is a is a consensus. economy somehow struggle on. andand Asia Pacific (No. that “the cumulative effect of of all regulatory initiatives could have an inadvertent permanently damaging effect on the the industry’s initiatives could have an inadvertent permanently damaging effect on industry’s profitability”. investment.uk Web: www.
and and There also a concern that the the had created a false sense of of security.” Apart fromfrom exposing banks torisk of a double dip recession. ThisThis concern underlay highhigh risk that Asian consequences.” way of steps to reduce the chances of another $15tr dip in economic activity. will. behaviour. an an outcome could put severe further pressure on prices and would clearly lead lead to a higher level of defaults”. loans aren't getting made and and a bunch more smaller banks havehaveto goto go belly which they they And on Capitol Hill. A respondent fromfrom a large bankbank said that “risk is inadequately calibrated below).” UK consultant economist David KernKern “inadequate as risky. On Wall Street. leading to inflation and interest rates that would impact property values and and ability of property owners to service theirtheir floating rate loans”.” and a Swiss banker observed that “product unwillingness to learn the the crisis. these attitudes also also bode ill forfuture. The The chief executive of a Eastern respondents placed on the economic outlook. leading to highhigh inflation and interest rates that would impact property values GDP. loans aren't getting made a bunch more smaller normal. brought a return of complacency. nada. A London economist wondered whether governments would be able able fine fine tune policy economist wondered whether governments would be to to tune policy sufficiently to navigate between “the “the Scyllainflation and and Charybdis of aof a sufficiently to navigate between Scylla of of inflation the the Charybdis double dip recession”. thus creating a bubble economy. eveneven recklessness tofinancial markets (see (see box brought a return of complacency.csfi. the the main as as “double dip in terms of global GDP. A UKA UK that that was still needed to up the the mess and stabilise economies. investment manager saw “the “the return of hubris/over-confidence the old short investment manager saw return of hubris/over-confidence and and the old short termterm habits among investment banks. A belief that the crisis is over over may also the political will to reform the financial A belief that the crisis is may also sap sap the political will to reform the financial system.just just there will return to the the practices that led to the problems. and a worsening of the business climate”. There was was also a concern that rallyrally had created a false sensesecurity. More needs to be be to create jobs jobs and boost credits and investment flows into productive industries”. new. Pricing for risk is being eroded. The director of project on financial reform said: “My “My worry is that a goodgood crisishavehave been wasted.
The C word The C word
Complacency may may bebiggest Banana Skin Skin ofMany of our respondents werewere Complacency be the the biggest Banana of all. or whether learnt. chief risk officer and would clearly to a higher level of defaults”. Elbert Pattijn. did did in 2007. these attitudes Apart exposing banks to the the risk of a double dip recession. A respondent a large US US said that “risk is inadequately calibrated against an uncertain economic recovery”. And on Capitol Hill.uk
. Pricing for risk is being eroded.which will. behaviour. TheyThey imply the lessons of the crisis may maybe be bode ill for the the future. nada.” and a Swiss banker observed that “product development goesgoes ahead almost before”. means many asset prices are are already starting to frothy”. On MainMain Street. saw saw main risksrisks“double dip in terms of global at Bank in in Singapore. notably Wall Street ones. The governance framework is more bureaucratic thanthan addressing risk”.” UK consultant economist David saw saw “inadequate changes in culture and mentality within the financial system. as itas it in 2007. On Wall Street. A respondent fromfrom an Australian bank said “parts of Asia Asiaimproving rapidly A respondent an Australian bank said that that “parts of are are improving rapidly and some of the issues are again emerging.” habits among investment banks.”
CSFI / New York CSFI E-mail: info@csfi. in the the danger we will get some symbolic moving of chairs and and nothing.org. there is a danger we will get some symbolic moving of deckdeck chairs nothing. but but as risky. cost cost of human resources is movingThe governance framework is more of human resources is moving up. The director of a USa US project on financial reform said: mainmain worry is that system.org. against an uncertain economic recovery”. bureaucratic addressing risk”. concern underlay the the risk that Asian respondents placed on the economic outlook. recklessness to the the financial markets box below). suchsuchoutcome could put severe further pressure on assetasset prices central scenario. Russian respondents specially gloomy. an inability or or changes in culture and mentality within the financial system.uk Web: www.up . Elbert Pattijn. Many of our respondents alarmed by the “business as usual” attitude of banks despite the hugehuge amount of alarmed by the “business as usual” attitude of banks despite the amount of workwork was still needed to clearclear upmess and stabilise economies. On Street. A senior bank economist said said that “significant credit risksgenerated by the overall instability in in economist that “significant credit risks are are generated by the overall instability the economy. A senior bank double dip recession”. A London the the ability of property owners to service floating rate loans”. or whether there will be a be a return topractices that led to the problems. Russian respondents werewere specially gloomy. the economy. up. A regulator wondered whether “changes in behaviour will result.C S F I / New York CSFI
central scenario. More needs todonedone to equities real estate. in way of steps to reduce the chances of another $15tr dip in economic activity. The create and boost credits and investment flows into productive industries”. an inability unwillingness to learn fromfromcrisis. or toor to new. imply that that the lessons of the crisis not not learnt. and a worsening of the business climate”. there is a real real banks yet yet belly up . The chief economist at a at a large hedge fund said thatmain concern “is that thatget yet yet chief economist large hedge fund said that his his main concern “is we we get another assetasset bubble developing and bursting…The excess liquidity markets another bubble developing and bursting…The excess liquidity in in markets means that that many asset pricesalready starting to looklook frothy”. folk folk are doing business as normal. A regulator wondered whether “changes in behaviour will result. thus creating a bubble economy. chief risk officer at DBSDBS BankSingapore. chief executive of a Far Far Eastern bankbank said that liquidity being poured mostly into into 'financial assets' such as said that liquidity “is “is being poured mostly 'financial assets' such as equities and and real estate. development ahead almost like like before”. are backback doing business as a crisis will will been wasted.
A new ‘asset A new ‘asset bubble’ onon the bubble’ the way? way?
Many respondents felt that that government actions to pump liquidity into markets Many respondents felt government actions to pump liquidity into the the markets had merely inflated an “asset bubble” which would eventually burst withwith damaging had merely inflated an “asset bubble” which would eventually burst damaging consequences. notably Wall Street ones. all. the the and some of the issues are again emerging.
A German bank adviser said thatwe havehave is whether lessons been learnt. because new new liquidity beenbeen because liquidity is such an urgent problem. ThisThis will mean more of them having to seek government support. banks’ funding costs.
What happens What happens after after Quantitative Quantitative Easing? Easing?
The The questionwhen and and how central banks wind down their programmes is is question of of when how central banks wind down their QE QE programmes crucial. Until they are are forced to large amounts.
CSFI / New York CSFI E-mail: info@csfi. particularly if hardhard economic a problem in the boom times.org.uk Web: www.that. can this continue? Will banks be be to to the tougher capital requirements that thaton the way. will not not lend. that liquidity risk needs to be be in the minds authorities. A A bank chairman described liquidity as “the “the next problem to solve. A German bank adviser said that “if “if we learnt something from the crisis. it is it is that liquidity risk needs toin the minds of of learnt something from the crisis. after the recent round of capital-raising.” Another respondent that that creates an illusion which will burst”. will mean more of them having to seek government support. A Eurozone regulator said:said: “The current optimismfinancial markets is probably overstated. and the ability/willingness of governments to support them begins conditions persist. regulator “The current optimism on on financial markets is probably overstated. 6. and force them to salt earnings away in the good times to helphelp contingency funding. A City City of London economist said: “Banks have too recent round of capital-raising. Until they forced to raiseraise equity and bankers (even bankers!) know this. eveneven after the Many respondents sceptical about the the adequacy of bank capital. The reopening of short longlong term but…liquidity is still very much an issue.” Another respondent said said “QE“QE creates an illusion which will burst”.
6. to fade. funded.way. The head of a European banking association said: “The demands of pay for the The head of a European banking association said: “The demands of the new new Basel/EU requirements in excess of some banks’ ability to raiseraise the the Basel/EU requirements are are in excess of some banks’ ability to the necessary capital. NewNew regulations will require banks to keep higher levels of liquidity which would regulations will require banks to keep higher levels of liquidity which would reduce the scale of this this risk.C S F I / New York CSFI
5. The The finance director aof a major international banking group saw banks crucial.” And And compulsion is onway. ThisThis concern was strongest in Europe. Capital availability (-) Capital availability (-)
Banks havehave been able to raise impressive amounts of new capital in wake of the the Banks been able to raise impressive amounts of new capital in the the wake of crisis. Now. The reopening of short and and term funding markets is fragile and and some firms still still overly wholesale and short term funding markets is fragile some firms are are overly wholesale and short term funded.” large amounts. post-central bank withdrawal”. But But they couldnow. and one one of issues not not viewed high risk area. A Eurozone Liquidity a high level concern for for all respondent categories. they could be be now. and of the the issues is whether lessons havehave been learnt. things are are different. Many respondents werewere sceptical about adequacy of bank capital. Many respondents also also made point that. A of London economist said: “Banks have too littlelittle equity and bankers (even bankers!) know this. particularly if economic conditions persist. banks been forced to refinance”. liquidity Many respondents made the the point until the the credit crunch at least. bad. concern was strongest in Europe. and therefore the cost cost of credit. Liquidity (1) Liquidity (1)
A critical shortage of liquidity triggered the credit crunch two two years ago. will will they be able to service them? requirements are are on the and and they be able to service them? ThisThis new new Banana Skin: shortages of capitalthe banking industry werewere never is a is a Banana Skin: shortages of capital for for the banking industry never a problem in the boom times.way. and therefore the of credit. 5. not not this Banana Skin shot to the the top of our survey last time. But But can this continue? Will banks able able meetmeet the tougher capital crisis. boards and and senior management”. but…liquidity risk risk is still very much an issue.uk
. It remains high.org. and force them to salt earnings away in the good times to pay for the bad. though some respondents feared this would add to reduce the scale of risk. which is why why this Banana Skin shot to top of our survey last time. Now. New rules will oblige banks to hold more capital and compulsion is on the the New rules will oblige banks to hold more capital and contingency funding. which is A critical shortage of liquidity triggered the credit crunch years ago. and the ability/willingness of governments to support them begins to fade. A City of London economist said he feared that “QE will before injected”. because liquidity is still still such an urgent problem. boards senior management”. UK UK bank chairman described authorities. until credit crunch at least. Banks' liquidity solvency position appears to to be critical for for the moment. Banks' liquidity and and solvency position appearsbe less less critical the moment. liquidity as next problem to solve. Then what? Liquidity was was a high level concern all respondent categories. but but because liquidity has has artificially created by central bankbank actions such as Quantitative Easing (QE) which artificially created by central actions such as Quantitative Easing (QE) which mustmust come to an at some point. they they willlend. Then what? come to an end end at some point. liquidity was was viewed as a as a high risk area. finance director of major international banking group saw banks suffering fromfrom excessive reliance on the hugehuge liquidity boost that central banks suffering “an “an excessive reliance on the liquidity boost that central banks havehave injected”. It remains high. post-central bank withdrawal”.csfi. A City of London economist said he feared that “QE will end end before banks havehave been forced to refinance”. though some respondents feared this would add to banks’ funding costs. necessary capital. things different.
the mutual sector in in UK. This is due to lessons learned. whereas decreased bank profitability will reduce the the supplycapital.org. occupations with credit derivatives. bankers ranked thisthis risk much higher (No. managing director of Lloyds Banking Group Scotland. or or people have got used to to them? Interestingly. TheThe risks derivatives are are still seen lie lie their complexity.” Landesbanks in Germany.” supply of of capital.”
7. TheThe head government relations at aat a large international banking group leverage. Therefore I have no no concerns about ongoing systemic risk. whereas decreased bank profitability will reduce increase demand for capital. 11) 11) and even regulators ranked risk much higher (No. The chief executive of a London-based bank saidsaid emphatically: “I think global banking system andand all London-based bank emphatically: “I think the the global banking system all major national banking markets are are sound.csfi. One banker summed up the the paradox: “Regulation taking unacceptable risks again”. “the is is the depth of of toxic debt remains largely hidden under carpet. Consultant Andrew Leung that. some eurozone banks.uk
. the Banking Act Act other factors. some Japanese banks. Consultant Andrew Leung saidsaid that.” cautious approach which restricts access to wholesale funding. which will put a Higher capital requirements also mean higher costs for banks. Therefore I haveconcerns about major national banking markets sound.” ongoing systemic risk. The strain profitability. One banker summed up paradox: “Regulation willwill increase demand for capital. “the riskrisk thatthat the depth toxic debt remains largely hidden under the the future. the the near “weapons of mass destruction”. and forces failures or consolidation which need not not have happened… It alsoalso leads to pessimism amongst rating agencies who adoptultra happened… It leads to pessimism amongst rating agencies who adopt an an ultra cautious approach which restricts access to wholesale funding. Is a sign that they have lostlost their sting. regulatory reformation. in in near future. One respondent said they remained “weapons of mass destruction”. Some banking respondents that higher capital requirements were unwarranted. the the mutualsFrance andand Spain.” Another respondent saidsaid thatoverly pessimistic outlook would result in in Another respondent that an an overly pessimistic outlook would result “regulators setting too much store by stress tests which turnturn to be too severe. that we were in danger of talking ourselves intointo another crisis. public and regulatory scrutiny.
Higher capital Higher capital requirements requirements may push banks may push banks to to take take greater risks greater risks
It’s not all all bad It’s not bad
A number of respondents saidsaid there was much pessimism around. there will be respondent from a Japanese bank that “as memories fade. “financial institutions and the financial systemaas a whole are there were risks. This reverses the usual position. given the the work that banks were doing clean up up their balance sheets and degiven work that banks were doing to to clean their balance sheets and deleverage. which willwill lead banks significant pressure from shareholders to boost returns. “regulators setting too much store by stress tests which out out to be too severe. but driven by by political misinformed agendas”. public and regulatory far safer than a ago. and even regulators (No. that while there were still still risks. this was “a “a issue.than non-bankers (No. saidsaid that while Susan Rice. This reverses the usual position. head of of government relations large international banking group saidsaid this waskeykey issue. The director of group riskriskaat a UK merchant bank said that “higher capital requirements director of group at UK merchant bank said that “higher capital requirements andand lower returns increase the relative attractions trading activities…” while a a lower returns increase the relative attractions of of trading activities…” while respondent from a Japanese bank saidsaid that “as memories fade.uk Web: www. andand that we A number of respondents there was too too much pessimism around. but driven political andand misinformed agendas”. a a poor understanding of the the exposures they create.” factors. and possibly create incentives to to take new risks.” Susan Rice. which lead to to banks taking unacceptable risks again”.7. especially with commodities andand foreign exchange derivatives and credit carpet. and forces failures or consolidation which need have constrains growth. andand poor risks in in derivatives still seen to to in in their complexity. mutuals in in France Spain. some eurozone banks.” Some banking respondents felt felt that higher capital requirements were unwarranted. One respondent said they remained understanding of exposures they create.” Higher capital requirements willwill also mean higher costs for banks. 5) 5) than non-bankers (No. the mutual sector the the UK.org.13). bankers have their sting. “financial institutions and the financial system as whole are far safer than a yearyear ago. Some respondents thought thatthat this risk would grow banks default swaps”. Derivatives (4) Derivatives (4)
This is the the lowest position that derivatives have occupiedthe the Banana Skins table This is lowest position that derivatives have occupied in in Banana Skins table since 2000 when they were viewed as an up-and-coming risk. which will put a strain on on profitability. and may be be connected with bankers’ occupations with credit derivatives. managing director of Lloyds Banking Group Scotland. 13). Is thisthis a sign that they since 2000 when they were viewed as an up-and-coming risk. economic factors. economic factors.C S F I / New York CSFI
eg eg some Japanese banks. and possibly create incentives take on on new risks. regulatory reformation. there will be significant pressure from shareholders to boost returns. This is due to lessons learned. ThisThis constrains growth. Landesbanks in Germany. thatthat people have got used them? Interestingly. the newnew Banking andand other scrutiny. Some respondents thought this risk would grow as as banks
CSFI / New York CSFI E-mail: info@csfi. especially with commodities foreign exchange derivatives and credit default swaps”. and may connected with bankers’ pre-pre(No. The chief executive of a were in danger of talking ourselves another crisis.
these rules thus create even more exotic products”. One respondent feared responses here. “I “I don't think anyone say that it does not not need improvement and attention. regulatory environments may adversely impact banks’ client base”. consultant to institutional fund managers Babson Capital Europe.org. One respondent feared relevant skills andand knowledge. professional institute managers may not not have learnt the Principal.uk
.uk Web: www. It is It is enough. waswas concerned about “the threat excessive speculation by financial Economics. The banks continue to take risks their books that they don't understand”. Whilst some of work being done will reduce risks through standardisation. One saidsaid that “simplification. reduced volumes and better transparency have made thisthis market safer”. a lack of rigour.
Worries about Worries about derivatives are derivatives are easing easing
8. and return the the complacency that existed lessons learned during the crisis.” said one banker. Giles Vardey. to learning.org. The The concept of banking'a 'a of risks. research visitor London School of corners on management. Giles Vardey.” ButBut what are the issues? what are the issues? Respondents identified a string of failings. Some respondents even felt the risks would get worse the the before crisis”. including an excessive focus on shortterm results. Some respondents even felt the risks would get worse in in difficult period ahead as banks struggled to make profits andand were tempted cut cut difficult period ahead as banks struggled to make profits were tempted to to corners on riskrisk management. Whilst some of the the work being done will reduce probably take at least three years. that “any significant 'tightening' of banking regulations willwill only servecreate new ways to circumvent 'tightening' of banking regulations only serve to to create new ways to circumvent these rules andand thus create even more exotic products”. steps to correct these failings. overdependence on on boxinstruments. enough. “This is the the key. “A profession? properly managed business should be on on properly managed business should be concept of banking as as top top of risks. a failure to ticking models. they say. poor understanding of newfangled term results. ButBut others felt there were reasons feelfeel more relaxed about the dangers of others felt there were reasons to to more relaxed about the dangers of derivatives.” said one banker. consultant to squeeze higher margins of low yield environment. “A profession? but a a source value etc. arguing thatthat there isneed for for arguing there is no no need TheThe question whether banks have question is is whether banks have learning. and return to to complacency that existed before the the crisis”. Others pointed out out that new regulations will force Over-the-Counter derivative Others pointed that new regulations will force Over-the-Counter derivative trading on to the the open exchanges where it can better monitored andand controlled.” said Henry Angest. thatthat “board members and senior “board members and senior Principal. Risk management quality (6) Risk management quality (6)
That riskrisk management banks leaves much to be desired is obvious. a failure to Is banking even appreciate thatthat risk managementnot not a Is banking even a a appreciate risk management is is a costcost but source of of value etc. concerned about “the threat of of excessive speculation by financial means. reduced volumes and better transparency derivatives. saidsaid that “any significant institutional fund managers Babson Capital Europe.. No other 'profession' is so so means. Group.csfi. resulting fragmentation between asset classes and regulatory environments may adversely impact the the banks’ client base”.. profession' has has taken a hammering profession' taken a hammering Chairman/CEO of Arbuthnot Banking Chairman/CEO of Arbuthnot Banking in the past 10 years withwith apologists in the past 10 years apologists Group. including an excessive focus on shortRespondents identified a string of failings. professional institute managers may have learnt the lessons of the the recent crisis and that their lessons of recent crisis and that their banks continue to take risks on on their books that they don't understand”. inadequate skills. the the resulting fragmentation between asset classes and risks through standardisation. A trading on to open exchanges where it can be be better monitored controlled. No other 'profession' is specific banking qualifications or or specific banking qualifications
CSFI / New York CSFI E-mail: info@csfi. poor understanding of newfangled instruments. One that “simplification. Stewart Fleming.” said Henry Angest.8. overdependence boxticking andand models. to learnt lessons from the the crisis and taken have an 'appropriate' qualification learnt lessons from crisis and taken have an 'appropriate' qualification without making clear what thatthat without making clear what steps to correct these failings.
cavalier in its requirement A A tone of scepticism pervaded the cavalier in its requirement for for tone of scepticism pervaded the practitioners to have proper andand practitioners to have proper responses here. a lack of rigour. A UKUK investment manager said that “the move an an exchange-traded basis will investment manager said that “the move to to exchange-traded basis will probably take at least three years. they say. “This is key. The managing director of product control at aat a Swiss bank worried that banks would “fail managing director of product control Swiss bank worried that banks would “fail to properly andand rigorously embed new control processes and cultures arising from to properly rigorously embed new control processes and cultures arising from the the lessons learned during the crisis. andand the That management in in banks leaves much to be desired is obvious. have made market safer”. Stewart Fleming. inadequate skills. the bankers among our our respondents ranked this Banana Skin almost highly as nonbankers among respondents ranked this Banana Skin almost as as highly as nonbankers. research visitor London School of Economics.” need improvement and attention. relevant skills knowledge.don't think anyone can can say that it does bankers.C S F I / New York CSFI
developed ever more innovative instruments to deal with tougher regulation andand developed ever more innovative instruments to deal with tougher regulation squeeze higher margins out outaof a low yield environment.
Many respondents commented on on the irrationality markets. probably plunging it back intointo recession and landing the banks with further heavy probably plunging it back recession and landing the banks with further heavy losses.
10. Equities (7) 10. dashing their recapitalisation plans. One of of them that “a “a major re-evaluation of credit risks has has now been factored in”. once again.C S F I / New York CSFI
institutions. symptom of unfounded optimism in financial sector.9. But generally the responses contained a of credit risks now been factored in”. andand spreads beginnarrow. far far ahead if there negative earnings surprises”. not to reflect the the correct balance between risk and reward”. also by pressures to to build profitability as as quickly as possible strengthen capital. bellwether of confidence” crisis that was essentially about confidence. ButBut not everyone saw risk management aas a black spot. Onethem saidsaid thatmajor re-evaluation different types of credit are priced.
9. Equities (7)
Equities have slipped down the the risk scale. banks he he concerned about “the loss of of good people”. Many suffer Canadian consultant that “there are few really good risk managers. driven not not only extremely lowlow (too low) interest rates and monetary institutions.uk Web: www. possibly because they have come back so Equities have slipped down risk scale. Concerns on on front are now easing as markets re-price credit riskriskmore relaxed levels. strengthen capital. possibly because they have come back so strongly since the the last Banana Skins survey when they had crashed. But the recovery is fuelling a fresh set set concerns around the the sustainability the the rally. propelling thisthis risk high the the list. and may start.csfi. propelling risk high up up list. One respondent pointed out that losses. andand dashing their recapitalisation plans. TheThe consequences another crash would be be severe for the “real economy”. A managing director in of of leading US investment banks saidsaidwaswas concerned about “the lossgood people”.
CSFI / New York CSFI E-mail: info@csfi. systemic risks coming years”. or or whether their seeming return to normality is another symptom of unfounded optimism in the the financial sector. would happen if there another crash. cope with cyclical losses andand raise new equity”.org. A Canadian consultant saidsaid that “there are few really good risk managers. only someone could explain why equities are are behavingthey are” moaned a UKUK consultant. TheThe markets re-price credit to to more relaxed levels. focus of concern has has shiftedwhether the the new spreads accurately reflect the level focus of concern shifted to to whether new spreads accurately reflect the level of riskrisk the the system. not adviser thought “spreads are tightening very fast. Concerns thisthis front are now easing as crisis. consequences of of another crash would severe for the “real economy”.org. to reflect correct balance between risk and reward”. But generally the responses contained a note of caution. A A managing director large Swiss bank saidsaid there had been “clear enhancements following the crisis” and large Swiss bank there had been “clear enhancements following the crisis” and the the risk manager aof a large Greek bank said that the work banks had done riskrisk risk manager of large Greek bank said that the work banks had done on on management willwill “improve the efficiency financial institutions andand reduce management “improve the efficiency of of financial institutions reduce systemic risks the the coming years”. A change in culture to include a more positive attitude towards management.managing director at aat a not everyone saw risk management as black spot. whether their seeming return to normality is but but another of in in system. once again. and what is fuelling a fresh of of concerns around sustainability of of rally. driven only by by extremely (too low) interest rates and monetary easing. Many respondents commented on the the need not just for stronger controls but for a Many respondents commented on need not just for stronger controls but for a change in culture to include a more positive attitude towards riskrisk management. executive management must be attuned to their issues”. and may start. but but also by pressures build up up profitability quickly as possible to to easing. andand executive management must be from little independence or or authority. The could explain why equities behaving as as they are” moaned a consultant. spreads begin to to narrow. A European regulator that “a “a reversal of credit spreads decrease we we are currently witnessing” was a “likely market risk”. Many respondents noted an improvement in the the credit default swaps market where Many respondents noted an improvement in credit default swaps market where different types of credit riskrisk are priced. A A German bank adviser thought thatthat “spreads are tightening very fast. But the recovery strongly since last Banana Skins survey when they had crashed. One respondent pointed out that equities were important not not just a source of earnings andand capital “but a a equities were important just as as a source of earnings capital “but as as bellwether of confidence” in ain a crisis that was essentially about confidence. A European regulator saidsaid that reversal of the the credit spreads note of caution. cope with cyclical losses raise new equity”. Credit spreads (3) Credit spreads (3)
Spreads may bebe Spreads may tightening tightening ‘too fast’ ‘too fast’
TheThe sudden widening credit spreads in mid-2007 waswas one the the triggers the the sudden widening of of credit spreads in mid-2007 one of of triggers of of crisis. A managing director in oneone the the leading US investment attuned to their issues”. and what would happen if there waswas another crash.uk
.German bank decrease are currently witnessing” was a “likely market risk”. Many suffer from too too little independence authority. The head of group riskriskaat a UK financial group said that “equity markets could have run head of group at UK financial group said that “equity markets could have run too too ahead if there are are negative earnings surprises”. “If “If only someone Many respondents commented the irrationality of of markets.
Managing director.org. reflecting mounting concern about the the quality governance within banks.senior Swiss banker said: “Firms’ governance mechanisms andand cultures crisis. perhaps. Currencies (13) 11. It was also seen to non-bankers regulators saw it as greater risk than bankers. and thus too “Boards still underpopulated with serious experts. – Bank director. is seen as playing a central roleroleanyany scenario that develops. Luxembourg. leave urgent issue”. “Boards are are still underpopulated with serious experts. bank supervisor dollar’s collapse and a major shift in in world’s reserves. One respondent said: “The market is very volatile andand subjectshifts in reaction to statements by senior financial officials”. – London trust company. even Will things better? The responses here were notable for their scepticism. No No surprise.
12. It was also seen to be more of an issue in America than in Europe or the the Asia Pacific region. – London trust company. their shareholders' short term interests”. Corporate governance (16)
This Banana Skin shows a strong riserise since the last survey. New York. Another described the the collapse the the dollar “a lowlow probability high impact event”. – Bank director. Another described have learned to with currency movements” said one banker. volatile subject to to shifts in reaction to statements by senior financial officials”.C S F I / New York CSFI
11. in in scenario that develops. leading to respondents focused on possibility that sentiment might finally crack. “I think we we a number of of respondents were more sanguine about currency risk. plunging the region into economic chaos. TheThe perceived failings corporate governance are are many. subservient to management. Here aisselection of of perceived failings of of corporate governance many. leading to the the dollar’s collapse and a major shift the the world’s reserves. be more of an issue in America than in Europe or Asia Pacific region. but could snap. that concern about quality of of governance within banks. is seen as playing a central currency”. “sensible hedging helps”.uk
.” – Economist. Doubts that much would their cynicism about corporate governance debate. A A bank supervisor sawsaw “possible market upheaval the the dollar becomes less important a reserve “possible market upheaval as as dollar becomes less important as as a reserve currency”. There is concern about “the static andand self-preserving ‘buddy There is concern about “the static self-preserving ‘buddy networks’ in high management thatthat will perpetuate incompetence. deficiencies.csfi. A A senior Swiss banker said: “Firms’ governance mechanisms cultures
Scepticism about Scepticism about the prospects the prospects for better for better governance governance
CSFI / New York CSFI E-mail: info@csfi. Currencies (13)
Focus onon the Focus the volatile volatile US dollar US dollar
TheThe currency markets are expected remain volatile over the the recovery period currency markets are expected to to remain volatile over recovery period because of the the sharp risegovernment borrowing andand the possibilitybig big interest because of sharp rise in in government borrowing the possibility of of interest raterate movementsthe the next year two. Doubts that much would change centred on banks’ seeming reluctance or inability to pick up the the lessons from change centred on banks’ seeming reluctance or inability to pick up lessons from the the crisis. and thus too subservient to management. reflecting mounting This Banana Skin shows a strong since the last survey. plunging the region into economic chaos. Corporate governance (16) 12.” – Economist. but could snap. andand leave urgent issue”. even their cynicism about the the corporate governance debate. hide networks’ in high management will perpetuate incompetence. One respondent said: “The market is very movements in in next year or or two.uk Web: www. “I think have learned to livelive with currency movements” said one banker. bank. with its massive holdings of dollars. New York. third saidsaid collapse of of dollar as as “a probability high impact event”. also on on other vulnerable countries such the the UK well as the the Baltic states whose currencies are vulnerable countries such UK as as well as Baltic states whose currencies are pegged to the the euro.org. Managing director. with its massive holdings of dollars. pegged to euro. Will things get get better? The responses here were notable for their scepticism. – – lie within organisations opposed to to pointing at external factors)”. China. that non-bankers andand regulators saw itaas a greater risk than bankers. Many respondents focused on the the possibility that sentiment might finally crack. TheThe risk lies“the failure of chief executives to serve the the interests of risk lies in in “the failure of chief executives to serve interests of their depositors andand customers rather than their own particular) andand their depositors customers rather than their own (in (in particular) their shareholders' short term interests”. Question marks alsoalso hang over the US dollar the the longer term with mounting Question marks hang over the US dollar in in longer term with mounting speculation thatthat could be be toppled from its reserve currency throne. China. but but also other focus is is particularly on US with its its trillion dollar debts. Here is a selection quotes: quotes: There is “a lack of realism in recognising thatthat the causesproblems There is “a lack of realism in recognising the causes of of problems lie within organisations (as (as opposedpointing at external factors)”. perhaps. surprise. US US bank. Many speculation it it could toppled from its reserve currency throne. hide deficiencies. TheThe focusparticularly on the the US with trillion dollar debts. A A third “sensible hedging helps”. ButBut a number respondents were more sanguine about currency risk. Luxembourg.
Informed depositors are willing to leave savings in banks and mutuals only where they are secured by government-backed deposit protection schemes or by government guarantees. and banks will have to work hard to repair it.
CSFI / New York CSFI E-mail: info@csfi.
13. A US banker feared that “financialeconomic pressures may lead to 'creative' accounting practices becoming more widespread”. Concern about this risk was strongest in the Asia Pacific region (No.” Several respondents raised the possibility of more bank failures. whether explicit or implicit ('too big to fail').org. what would the public and government reaction be? Has all the stress testing dealt with this issue?” Mistrust is not just about the soundness of banks but about the quality of their accounts. They are still seen as volatile and unpredictable.” Adrian Lloyd. said that “the expectations of management and especially non-executive management is a major concern. particularly where governments can no longer afford to bail them out. Another concern was the lack of high calibre non-executive directors.org. Many respondents felt that “accounting fudges” were being used to conceal the worst of bank exposures.uk
. 6). Many will struggle to do this”. with oil and gold heading the list. and China’s voracious appetite and US energy profligacy the causes. and that the answer lay in “removing the interference of governments and politics in management”.C S F I / New York CSFI
need to fully embed the lessons from the past 18 months. said that “confidence in banks in Europe and the USA remains fragile at best. and that sophisticated trading techniques were being deployed to move risk out of sight. Commodities (12)
Concern about the risks in commodity markets has changed little during the course of the crisis. Dennis Cox of bank consultancy and training firm Risk Reward.
The damage done by the crisis to confidence in banks could be a major source of risk. limiting the ability of a number of banks to regain capital strength and develop. The risk was that more regulation would weaken the sense of responsibility of bank managements and directors.csfi.uk Web: www. investors and governments has damaged credibility in the sustainability of the system. This was a recurring theme in the responses to this survey. and we doubt whether there is the talent required to meet these revised obligations”. A fund manager said that “the fall in confidence by the public. Another respondent put it more bluntly: “Reforms will happen – but who in their right mind would want to be a bank NED?” But many respondents also felt that the corporate governance debate was on the wrong track. enforcement and regulatory affairs director at the UK’s Banking Code Standards Board. A UK respondent asked: “If there is another significant bank that fails during this recovery process. Redressing this will take years.
a rise in in rates looks inevitable. begin to its its ugly head.C S F I / New York CSFI
Respondents made the the point that commodity volatility should not pose a major risk Respondents made point that commodity volatility should not pose a major risk to banks because these markets are are well understood. Michael Taylor. the past. A A divisional director of oneone the the large UK building societies was concerned about “ongoing director of of of large UK building societies was concerned about “ongoing super lowlow interest rates which suppress margins”. to greater risk-taking to earn profits. and there are plenty of of ways banks can can protect themselves against them. A A Luxembourg banker feared thatthat “the negative impactthe the P&L the the banks may occur before banker feared “the negative impact to to P&L of of banks may occur before balance sheets are are restored from the impact the the current crisis”. “Still volatile – still prone to to over-reaction”. Some problems their own. the timing thereof. but have we something worse.org. uncertainty riskrisk for banks a flattening of the the emergence of inflation.
14. saidsaid that “big movements must be be impact of central bank policies on the the that “big movements up up must impact of central bank policies on expected at some point. the timing thereof. biggest future value of currencies. They squeeze profitability.
CSFI / New York CSFI E-mail: info@csfi. Will have a a respondent asked: “What happens when 'punch bowl' is removed.org. correspondingly to greater risk-taking to earn profits.csfi. uncertainty about the ability of of the past. andand correspondingly respondents them providing a spur productive sector. The The biggest problem now is the biggest problem now is the
A surge in in interest A surge interest rates is is inevitable. “So far the the extraordinary measures have worked the the sense that they have averted extraordinary measures have worked in in sense that they have averted something far far worse. fearfear of repeating the mistakes of cause problems. but also but also predictable predictable
Meanwhile. uncertainty about the ability policy andand technical director the the counterparties to staystay solvent. A shift in the the yield curve could job: job: government regulation in widest debts. They alsoalso squeeze profitability. Some inhibiting the extending of credit to the the inhibiting the extending of credit to respondents sawsaw them providing a spur productive sector. how will China react if it cannot gain access to the the resources it needs? resources it needs? “Still volatile – andand still proneover-reaction”. interest rates can bring All these leadlead to excessive caution. inflation may also begin to rearrearugly head. TheThe biggest future value of currencies. uncertainty about central bank policy. of repeating the mistakes of alsoalso cause problems. At point. and there are plenty ways to banks because these markets well understood. One while the rate outlook is is alarming. adviser to the the Central BankBahrain. ButBut while the rate outlookalarming. on on the emergence of inflation. how will China react if it cannot gain access to oil do to Middle East and Russia. super interest rates which suppress margins”. Association Corporate Treasurers. The fun term outlook to year?) is is low and relatively stable interest rates.uk
. problems of oftheir own. is to to some extent predictable. divisional balance sheets restored from the impact of of current crisis”. but have we thereby already laidlaid the foundations for thereby already the foundations for The caution factor The caution factor the the next crisis?” next crisis?”
combination of the following factors Rising rates would put put strain on on combination of the following factors Rising rates would a a strain distracting management from doing their borrowers andand produce a surge badbad distracting management from doing their borrowers produce a surge in in government regulation in the the widest debts. when central banks have to extricate themselves from the the markets and comes later. when central banks have to extricate themselves from markets and governments begin to address their mounting debts. Association of of Corporate Treasurers. Interest rates (9) 14. Consultant Paul Hattori that “long values. uncertainty for banks is is a flattening of about the the inevitability of latter andand about inevitability of the the latter yield curve”. uncertainty about central bank policy.Luxembourg come to believe worst is is over”.reexpected at some point. yield curve”. adviser to Central Bank of of Bahrain. A shift in yield curve could sense. At thatthat point. The medium term outlook (up (upato a year?)for for low and relatively stable interest rates. One respondent asked: “What happens when the the 'punch bowl' is removed. inflation may also governments begin to address their mounting debts. Will we we have series of raterate rises similar1994?” series of rises similar to to 1994?” TheThe impact couldsevere. sense.uk Web: www. banks protect themselves against them. Michael Taylor. All these to excessive caution. John Grout. rates inevitable. the the increasing risk of mispricing of asset increasing risk of mispricing of asset Consultant Paul Hattori saidsaid that “long values. it isitalsoalso some extent predictable. policy technical director at at counterparties to solvent. saidsaid one respondent. “So far warned changes in in interest rates would hit asset values bond prices. Interest rates (9)
Concern about interest rates has has easedat– least for for the time being. impact could be be severe. andand a riserates looks inevitable. John Grout. andandthe re. The medium Concern about interest rates eased – at least the time being. one respondent. lowlow interest rates can bring Meanwhile. term interest rates at lowlow levels will term interest rates at levels will chairman only encourage investors to do do more City City chairman only encourage investors to more stupid things in search of yield as they stupid things in search of yield as they come to believe the the worstover”. warned thatthat changesinterest rates would hit asset values andand bond prices. In some ways the the greater risks in the the political consequences: what will unstable In some ways greater risks lie lie in political consequences: what will unstable oil do to the the Middle East and Russia. The fun comes later.
or that new what is risk: that perverse incentives will destroy banks.am am convinced more serious frauds will be state of tide. leaving some markets vulnerable to ato a shortagetalent.
CSFI / New York CSFI E-mail: info@csfi.” saidsaid another. Moreover. region (No. many respondents commented the surprising scarcity of frauds during a time of recession. Management incentives (17)
What is is worse: What worse: paying bonuses or or paying bonuses banning them? banning them?
TheThe row over bonuses and incentives has pushed this Banana Skin a place. A A Russian respondent that information security waswas probably the greatest risk that Russian banks faced over information security probably the greatest risk that Russian banks faced over the the next 2-3 years. Martin Hall. TheThe concern both about internal andand external fraud systems become more concern is is both about internal external fraud as as systems become more complex andand vulnerable. confidence resulting in excessive caution”. andand that opposing view holds that remuneration should not be be a political issue. next 2-3 years. A banker added thatthat “perverse incentives (not necessarily the level of firms”. leaving some markets basis so there is is a a on on talent to other markets. TheThe main variationthisthis risk was geographical: it scored higherthe the Asia Pacific main variation in in risk was geographical: it scored higher in in Asia Pacific region (No. In fact.uk Web: www.” said one respondent. come to light. head of regulatory strategy at aatlarge US US bank said that “fraud may undermine investor regulatory strategy a large bank said that “fraud may undermine investor confidence resulting in excessive caution”. according to to Topi Manner. management risk taking.London consultant saidsaid that the situation was remain in political doghouse”. TheThe opposing view holds that remuneration should not a political issue. Management incentives (17) 16.” said one respondent. In fact. that attempts to regulate it could endend damaging the the business. A London a country-by-country basis rather than through international agreement. A banker added “perverse incentives (not necessarily the level of incentives) are are the core our our industry's problems. and dulling bankers’ sense of risk. bonus culture was not only out out control but but dangerous: waswas creating the wrong incentives. banks were failing to take on board thatthat something bankers’ sense of risk. A A London consultant that the situation was “gradually improving – but but the need for reform not not yet fully ‘owned’ the the “gradually improving – the need for reform is is yet fully ‘owned’ by by firms”. Moreover. banks were failing to take on board something needed to be done about it. These have not been solved”. Advances in in electronic technology always widening the scope for for intrusion and data manipulation. all all levels significant incentives) the core of of industry's problems. a non-executive director of Broadcastle needed to be done about it. Fraud (11)
One reason why fraud has has slipped down the rankingthatthat there have been few One reason why fraud slipped down the ranking is is there have been few recent headline-grabbing cases. A concern among banking respondents waswas the effect that a big bank fraud might A concern among banking respondents the effect that a big bank fraud might have on banking confidence at aat a time when the systemso fragile. TheThe bonus culture was not only Non-bankers tended towards first of of these views. ButBut row over bonuses and incentives has pushed this Banana Skin up up a place. saidsaid that “banks not not appear have got got the message and are likely to Bank. and among emerging economies (No. A German bank respondent warned tax tax and regulatory interferencebonuses “could lead to ato a deteriorationmorale”. Russian respondent saidsaid that vice-president at Nordea Bank Finland. leading to decline in market position?” This not not merely Anglo-Saxon preoccupation. and dulling of of control dangerous: it it creating the wrong incentives. though was not exactly bank fraud.csfi. Martin Hall. or that new regulation/tax willwill kill the golden goose? Respondents were sharply divided thisthis regulation/tax kill the golden goose? Respondents were sharply divided on on question.
16. that “banks do do appear to to have the message and are likely to remain in the the political doghouse”.uk
. leading to decline in market position?” This waswas vulnerable shortage of of talent. 10) 10) and among emerging economies (No. Madoff being a case in point. specially if it is done on a country-by-country basis rather than through international agreement. according Topi Manner. TheThe incidencefraud “has not not yet risen as much as oneone would expect given the incidence of of fraud “has yet risen by by as much as would expect given the state of the the tide. question. 6). A German bank respondent warned thatthat merely an an Anglo-Saxon preoccupation.C S F I / New York CSFI
15. many respondents commented on on the recent headline-grabbing cases. and regulatory interference in in bonuses “could lead deterioration in in morale”. Non-bankers tended towards the the firstthese views. executive scope intrusion and data manipulation. exposed before economic recovery arrives. A London investment banker asked: “Will remuneration be sorted out out a level playing field investment banker asked: “Will remuneration be sorted on on a level playing field basis so thatthat there not notrun run talent to other markets. Advanceselectronic technology are are always widening the complex vulnerable. though thatthat was not exactly bank fraud. Fraud (11) 15. “I “I convinced more serious frauds will be exposed before economic recovery arrives. specially if it is done on attempts to regulate it could up up damaging business. executive vice-president at Nordea Bank in in Finland.org. TheThe head of have on banking confidence time when the system is is so fragile. 6). Madoff being a case in point. what is the the risk: that perverse incentives will destroy banks. These have not been solved”.org. a non-executive director of Broadcastle Bank. at at levels of of significant management andand risk taking. which is usually when they surprising scarcity of frauds during a time of recession.” another. which is usually when they come to light.
the pace the Ten in in earlier times – see page 10).C S F I / New York CSFI
A US US bank risk manager even argued that. and in some areas such as the customercustomer interface it has pace of change has slowed. There “overconfidence in the the safetyemerging markets”.
A better prospect. High dependence on technology (15)
TheThe high dependence technology thatthat banks have built over the the yearsno no high dependence on on technology banks have built up up over years is is longer the the critical issue thatonce waswas (this Banana Skin was consistently the the longer critical issue that it it once (this Banana Skin was consistently in in TopTop Tenearlier times – see p ??). emerging markets other respondents were more upbeat. leaving just a few playersbenefit”.org. 5). “If these firms are are not permitted schemes attracted the best talent to to manage it. hence a lowering the the “more awareness concern about perverse incentives. both of which points of view might be over-optimistic”. of view might be over-optimistic”. said. even been pushed back bit with to drive a more personalised service. senior research associate safety of of emerging markets”. and hence not the best stewards turnturn these firms be be brightest and best. James Prichard. it waswas the the public interest have compensation dollars of taxpayers’ money. the the opaque Some of caution has to to do with uncertainty over China’s prospects. hence a lowering of of riskrisk level”. A Swiss banker saw this risk “falling due to to compensation rules”. The problems are better understood.
18. according to the the directorriskrisk management at onethe the large regional development banks. the tone of of many responses cautious. level”. with banks now holding billions of A bank risk manager even argued that. andand the growing assertiveness leaders in Latin political situation in Russia. it is hard to generalise. The chief risk officer at bank in in India there was “a general perception thatthat the country either fairly immune to economic activity general perception the country is is either fairly immune to economic activity elsewhere. This was rankedTopTop Ten risk the the Asia Pacific region. Concern about the the macro-economic outlook was stronger among respondents from Concern about macro-economic outlook was stronger among respondents from emerging countries (No. The chief risk officeraat a bankIndia saidsaid there was “a create more debts”.. senior research associate at the the UK’s Overseas Development Institute. according to Sheila Page. in today’s environment. we will find that those who remainemployment there willwill to competitively. both of which points elsewhere. leaving just a few players to to benefit”. waswas particularly concerned about emerging European economies where. particularly concerned about emerging European economies where. issues remain. or is already benefiting from an economic recovery. of change has slowed. This was ranked a a Ten risk in in Asia Pacific region. A A regulator that there was “more awareness andand concern about perverse incentives. it is hard to generalise. we will find that those who remain in in employment there not not the the brightest and best. thatthat collateral pledged proves be worth lessless than initially performing anyway.org. and in some areas such as the interface it has even been pushed back a bit withathe drive thedeliverto deliver a more personalised service.” payment systems are among the risks that banks face currently. TheThe chief executivean Indian bank saidsaid particularly among emerging economies. mainly because of dangers over-hasty recovery producing asset bubbles. Emerging markets (18)
AreAre emerging markets a risky bet in today’s environment.
17. 5).csfi. according to Sheila Page.uk Web: www. collateral pledged proves to to be worth than initially thought andand that rising unemployment and corporate insolvencies the the region thought that rising unemployment and corporate insolvencies in in region create more badbad debts”. a better prospect than emerging markets a risky bet or. a better prospect than the the developed world? developed world? Clearly. Clearly. There waswas “overconfidence in dangers over-hasty recovery producing asset bubbles. or.”
CSFI / New York CSFI E-mail: info@csfi. mainly because of the the emerging countries (No. The problems are better understood. chief executive of of an Indian bank thatthat “operational and reputational risks from increasing dependence technology “operational and reputational risks from increasing dependence on on technology andand payment systems are among the risks that banks face currently. opaque political situation in Russia. meant “many banks are pulling back.” around return the government/taxpayers funds. that worries about emerging market exposure meant thatthat “many banks are pulling back. James Prichard. High dependence on technology (15) 18. A better prospect. director of banking supervision at the the Bank Greece.uk
. or is already benefiting from an economic recovery. “Vulnerabilities remain”. according to at UK’s Overseas Development Institute.” ButBut others felt the steam was going outthe the issue. ButBut issues remain. “If these firms not permitted to paypay competitively. saidsaid that worries about emerging market exposure trader at WestLB in London. ButBut other respondents were more upbeat. Ioannis Gousios. with banks now holding billions of dollars of taxpayers’ money. director of of management at one of of large regional development banks. Emerging markets (18) 17. particularly among emerging economies. A Swiss banker saw this risk “falling duecompensation rules”.regulator saidsaid that there was others felt the steam was going out of of issue. or or risky bet? a a risky bet?
Some of the the caution hasdo with uncertainty over China’s prospects. he he said. director of banking supervision at Bank of of Greece. the growing assertiveness of of leaders in Latin America. an an emerging markets trader at WestLB in London. it in in public interest to to have compensation schemes thatthat attracted the best talentmanage it. and hence not the best stewards to to these firms around andand return the government/taxpayers funds. there waswasriskrisk that “loans that were restructured avoid default become nonthere a a that “loans that were restructured to to avoid default become nonperforming anyway. “Vulnerabilities remain”. 3) than industrial countries (No. Ioannis Gousios. 3) than industrial countries (No.. America. but but the tone many responses waswas cautious.
all Banana Skins are are risks to the bottom line. according to to respondent. as as is data security. multinational development bank Credit strategist. The The prospects banking profitability are are not great. regulatory constraints. attacks on on client bank accounts willwill increase”. UK building society Chief executive. Regulatory moves are are also afootput put them a shorter leash.run. hedge funds during crisis. thanks to a raft of factors prospects for for banking profitability not great. one respondent.C S F I / New York CSFI
Bottom line worries Bottom line worries
Ultimately. Here is a selection comments on thatthat theme. New York exchanges increase technology risk. generate sufficient profit to remain viable. which will lead to lower equity prices andand more problems raising new capital. and tighter regulatory constraints. all the the morein Europe if leverage is capped withwith relatively little regard the the all more so so in Europe if leverage is capped relatively little regard for for quality of what is being leveraged. Board member. near-term budgetary concerns. Regulatory moves pointed that they were actually better managed than banks.csfi. short selling andand shareholder activism. ButBut the funds are still making their presence felt. according oneone respondent. Chief executive. in with the generally lower profile taken by hedge funds during the the crisis. The upcoming migration of of Over-the-Counter derivatives to public exchanges willwill increase technology risk. which will lead to lower High capital requirements will reduce return on equity.uk
. German bank Board member. Hedge funds (10) 19. allied with the the need invest in upgrading/replacing legacy systems. multinational development bank High capital requirements will reduce return on equity. in lineline with the generally lower profile taken by A dramatic drop in concern here. A Russian management of of online systems big problem. Some respondents pointed out out that they were actually better managed than banks. quality of what is being leveraged. Real money investors make longer term decisions with their own money”. willwill placehuge with need to to invest in upgrading/replacing legacy systems. banking trade group Executive director. An investment banker said that the funds are still making their presence felt. thanks to a raft of factors including general economic weakness. place a a huge burden on budgets over the the next 2-3 years”. low low interest rates. saidsaid one respondent.uk Web: www. Real money investors make longer term decisions with their own money”. short selling shareholder activism.” in many financial institutions for short-sighted. interest rates. Credit strategist. Some respondents made the the point that risk not only lies with the systems but in Some respondents made point that risk not only lies with the systems but in managing – andand retaining – the people who run them and understand them. German bank
TheThe managementonline systems is ais a big problem.
A sharp drop in in A sharp drop concern about concern about hedge funds hedge funds
TheThe funds are not attracting the level attention they did did earlier through their funds are not attracting the level of of attention they earlier through their aggressive position taking. An investment banker said that while hedge funds “are not not now a concern with respect driving up leverage in in while hedge funds “are now a concern with respect to to driving up leverage
CSFI / New York CSFI E-mail: info@csfi. Executive director. burden on budgets over next 2-3 years”. all Banana Skins risks to the bottom line.org. “The once dominant sector is no longer also afoot to to them on on a shorter leash. Here is a selection Ultimately. “What if it isn't? It has been starvedresources information technology is well “What if it isn't? It has been starved of of resources in many financial institutions for short-sighted. comments on theme. A banker in Luxembourg saidsaid banks depended “on particular individuals with a monopoly”. allied technology to keep pace with monitoring and management of of risk. in charge. political pressure on banks to engage in low-profit activities for the good of the the economy. New York economist Roger Kubarych saidsaid that firms and regulators take for granted that economist Roger Kubarych that firms and regulators take for granted that information technology is well run. in Luxembourg banks depended “on particular individuals with a monopoly”. Lack of profitability is going to be a drain on vitality of the the system going forward. UK building society Lack of profitability is going to be a drain on the the vitality of system going forward. This. banking trade group There must be concern about whether financial services firms will be ableable to There must be concern about whether financial services firms will be to generate sufficient profit to remain viable. attacks client bank accounts respondent that “as internet banking develops. Some respondents aggressive position taking. A banker managing – retaining – the people who run them and understand them. Hedge funds (10)
A dramatic drop in concern here.” Consultant Steve Dyson saidsaid that “the sector needsinvest a huge amount in new Consultant Steve Dyson that “the sector needs to to invest a huge amount in new technology to keep pace with the the monitoring and management risk. “The once dominant sector is no longer in charge. A Russian respondent saidsaid that “as internet banking develops. The upcoming migration Over-the-Counter derivatives to public increase”. This. near-term budgetary concerns. equity prices more problems raising new capital.is data security.org. and tighter banks to engage in low-profit activities for the good of economy. political pressure on including general economic weakness.
Since major incidents tend to occur every 3-4 years. the time for another one must be approaching. The last survey (in 2008) followed the discovery of Jérôme Kerviel’s massive fraud at Société Générale.uk Web: www.
22. one respondent said that “at present there is more risk to the funds than from them”. Referring to regulatory initiatives in this area. said one. Paul Lejot of the Asian Institute of International Financial Law said that “a loss of business is likely from the regulated sector”. as are crashes in the system.
20. Since then.org. said one consultant. they are making work-outs more volatile/uncertain as they are purchasing distressed debt at significant discounts and acting with a very different agenda to banks within work-outs”. pandemics such as swine ‘flu are there too. the broader feeling is that banks have put a lot of work into this area. “Many hedge funds will relocate outside the EU”. In Hong Kong. Retail sales practices (20)
The mistreatment of retail clients continues to be a source of risk to banks. the risk is “over-promising in a competitive market fuelled by bonus objectives”.” A consultant observed that there are “fewer traders.. there have been no major incidents. Although terrorist attacks continue to earn mentions as potential sources of risk. and are less vulnerable.C S F I / New York CSFI
buy-outs etc. even though the worst of the mis-selling abuses may now be behind us.
21. and so the risk of rogue trading is seen to have eased. though some respondents felt that mis-selling is now so deeply ingrained in banks that they will have trouble adjusting. But those that are left may be under more pressure to save their jobs (which is a more powerful encouragement to fraud than getting a bonus)”. Some of the risk is of a reputational kind.csfi. Many respondents said that banks’ exposure to hedge funds needed to be “well-managed”. Business continuation (23)
Little change in the perceived risk here: the Banana Skin that shot high up the list in the wake of 9/11 has eased off sharply. However. New regulation proposed through initiatives like the FSA’s Retail Distribution Review to separate the sales and advice functions in financial products should help contain some of this risk. some financial.uk
. A regulator said: “The risk is always there. “Some danger of this falling off the radar”. Rogue trader (14)
This Banana Skin goes up and down in line with recent history. The answer seems to be yes.
CSFI / New York CSFI E-mail: info@csfi. However some respondents feared that tougher controls would merely drive the sector to less well regulated centres. In the words of a Canadian banker. They tend to be discovered in falling markets. Regulation will be “a huge shock” said one UK respondent. though this could also lead to complacency. The question is whether the pressures of recession make a rogue trader more likely.org.
will start “mistreating” the banks. saidsaid a London investment manager. tracking defaults processing business. Who bankers now supposed to to serving: their customers. non-bankers think the bankers are ignoring it. ensuring contract enforceability.group been rescued from banks’ mistakes. Many our our risks in in back office usually arise because of of cutting. their shareholders or taxpayers? One respondent saw the risk increasing “as “as the oligopoly shrinks and governments get more entwined with the increasing the oligopoly shrinks and governments get more entwined with the financial services industry”. Many of of respondents saidsaid that back office budgets had been trimmed partpart recessionrespondents that back office budgets had been trimmed as as of of recessiondriven cutbacks. for incentives) which bankers and non-bankers take sharply different views. TheThe bankers’ viewpoint was summed by a a combining many different functions. A A group strategist at oneone the the large UK banks foresaw further erosion of anyany sense of strategist at of of large UK banks foresaw “a “a further erosion of sense of personal responsibility by consumers”. these conflicts have also with the intrusion of of state ownership during crisis.
Conflicts are Conflicts are becoming more becoming more complicated complicated
24. if not not the conflicts in business”.org. Conflicts ofof interest (21) 23. products”. bankers think they understand the risk and play it down. bankers’ viewpoint was summed up up by respondent from a Channel Islands bank: “This is always an issue. the the non-bankers think the bankers are ignoringwilfully or otherwise. Even though business volumes driven cutbacks. ButBut with the intrusionstate ownership during the the crisis. the complexity of of current environment – – plus panics failures – means thatthat banks need have very robust back offices. a riskrisk that has grown with the emergence“universal banks” those of their clients.
23. to to take a tougher with delinquent customers. well managed in our our business”. Even though business volumes are are down. having delinquent customers. documenting collateral and guarantees. TheThe riskthatthat banks will damage confidence placing their own interests above risk is is banks will damage confidence by by placing their own interests above those of their clients. objective banks should be be to make their sales risk cultures more consistent.uk Web: www.org. Some respondents feared that it may aggravate them forcing banks retail end. if the conflicts themselves. Who are are bankers now supposed be be serving: their become more complex. TheThe bankers think they understand the risk and play it down. these conflicts have also become more complex. waswas rising. a that has grown with the emergence of of “universal banks” combining many different functions. having been rescued from the the banks’ mistakes. Others said that the perception conflicts.csfi. themselves. but but well managed respondent from a Channel Islands bank: “This is always an issue. andand take a tougher lineline with to pass the costs of of additional regulation.uk
. these conflicts reducing the scale of of risk. There is alsoalso the opposite risk: that bank customers.
CSFI / New York CSFI E-mail: info@csfi. “Cost cutting andand consolidation strains are impacting the ability [of banks] to “Cost cutting consolidation strains are impacting the ability [of banks] to strengthen processes andand controls around new product offeringsaat a time when they strengthen processes controls around new product offerings at time when they are are already struggling provide an an adequate service for existing clients for already struggling to to provide adequate service for existing clients for products”. financial services industry”. Richard Higham of of sales training consultancy Mercuri International said the Richard Higham sales training consultancy Mercuri International said the objective for for banks should to make their sales andand risk cultures more consistent. However a number of respondents felt felt that banks and regulators were addressing However a number of respondents that banks and regulators were addressing these conflicts andand reducing the scalethe the risk. it. but but documenting collateral and guarantees. over past year”. tracking defaults andand ensuring contract enforceability.C S F I / New York CSFI
There is alsoalso the wider questionhow the the crisis will affect banking relationships at There is the wider question of of how crisis will affect banking relationships at the the retail end. Back office (19) 24. fairly obvious reasons. Conflicts interest (21)
This is oneone those Banana Skins (like corporate governance andand management This is of of those Banana Skins (like corporate governance management incentives) on on which bankers and non-bankers take sharply different views. their shareholders or the the taxpayers? One respondent saw the risk customers. for fairly obvious reasons. personal responsibility by consumers”. There is the opposite risk: that bank customers. Others said that the perception of of conflicts. the complexity the the current environmentplus panics andand failures – down. This would help them “retain good customers who feelfeel abused their treatment This would help them “retain good customers who abused by by their treatment over the the past year”. rising. wilfully or otherwise. will start “mistreating” the banks. Back office (19)
TheThe risks the the back office usually arise because costcost cutting. is only a matter of processing business. andand that these were false savings. a London investment manager. Some respondents feared that it may aggravate them by by forcing banks to pass on on the costs additional regulation. that these were false savings. It isItnot not only a matter of means banks need to to have very robust back offices.
Payment systems consultant Nick Collin investment they have into this area. Environmental risk (25) 25. who cares?” was responses. in responses. A looming issue is how back offices willwill cope withgrowing regulatory andand A looming issue is how back offices cope with a a growing regulatory compliance workload. Payment systems (27)
An area facing An area facing competition from competition from non-banks non-banks
Like the the back office. much work has also been done to to improve side of of banks’ operations through greater automation andand the resolution specific problems likelike operations through greater automation the resolution of of specific problems derivatives settlement. though. notably the movereal-time payment andand settlementboth speed reliability. another Swiss banker admitted to dilemma over “the“the this workload. 25. At the the same time.C S F I / New York CSFI
On On the other hand. who cares?” was another. with added value applications". the exposures are not criticalnear term. Payment systems consultant Nick Collin saidsaid that “the piecemeal deployment of Faster Payments [the UK electronic that “the piecemeal deployment of Faster Payments [the UK electronic payments system] has has meant that the banking industry has not mademuch out out of payments system] meant that the banking industry has not made as as much of thisthis huge leap forward near-real-time payments as they might have done. so so obviously on the the radar screen. where financial. however the spectre of of new regulations accounting standards willwill add new demands”. pollution liability. This risk with many angles: reputation. even impatience. prominence of Copenhagen Summit. Bankers are are not known giving a high ranking to environmental risk. reflecting a belief thatthat the riskprofits is political rather than financial. the exposures are not critical or or near term.it isit is rising risk: 10 10 year.uk Web: www. andand huge leap forward in in near-real-time payments as they might have done. Looking at the budgetary implications of of this workload. Payment systems (27) 26.org. but becoming less with established systems andand was “always a a area. much work has also been done improve thisthis side banks’ the other hand. And they have held up well in the the crisis.csfi. the environment has always earned a a high place as rising risk: No. and direct financial exposure.
26. Environmental risk (25)
No No change here despite the growing pressures climate change andand the recent change here despite the growing pressures of of climate change the recent prominence of the the Copenhagen Summit. litigation (banks are “deep pockets”). One riskrisk that was mentioned was that banks may not make the most the the One that was mentioned was that banks may not make the most of of investment they have put put into this area. And these have stood up up well during crisis. A respondent from a large Swiss bank that “pressures on back offices seem to be be easing. processes”. highest position thisthis Banana Skin has reachedmore than 15 years of surveys is No. even impatience. ButBut waswas hard ignore a tone of dismissiveness. another Swiss banker admitted to a a dilemma over implementation of regulations versus costcost control pressure”. costcost and direct financial exposure.No. on on a with concern about the global economy. TheThe highest Bankers not known for for giving a high ranking to environmental risk. obviously on radar screen.
25. litigation (banks are “deep pockets”). another. “the keyfinancial stability” in the the more could always be done in what is. position Banana Skin has reached in in more than 15 years of surveys is 25. “Overstated” one comment. Looking at the budgetary implications accounting standards add new demands”. One respondent listed climate change as an issue thatthat could complicate the economic recovery and make life change as an issue could complicate the economic recovery and make life difficult for banks as well. notably the move to to real-time payment settlement at at both the the wholesale and retail levels.uk
. “At the moment. all. the environment has always earnedhigh place as a a At same time.org. after all. And these have stood well during the the crisis. andand even reflecting a belief the risk to to profits is political rather than financial. But more could always be done in what is. thisthis year. One banker said that thisthis was “alwaysriskrisk area.
CSFI / New York CSFI E-mail: info@csfi. even where it isit is financial. difficult for banks as well. however the spectre new regulations andand back offices seem to easing. “At the moment. But wholesale and retail levels. A respondent from a large Swiss bank saidsaid that “pressures on compliance workload. implementation of regulations versus control pressure”. This is ais a risk with many angles: reputation. One respondent listed climate pollution liability. in the the it it hard to to ignore a tone of dismissiveness. though. have so far not not beenain a positionbuild on the the relatively rich FPS infrastructure have so far been in position to to build on relatively rich FPS infrastructure with added value applications".No. after “the key to to financial stability” in words of oneone respondent. thisan area where much work has has been done improve Like back office. words of respondent. a par par with concern about the global economy. “Overstated” waswas one comment. And they have held up well in crisis. this is is an area where much work been done to to improve speed andand reliability. One banker said that derivatives settlement. but becoming less so so with established systems processes”.
org. with risk that some of them willwill not work. we see continued risk-taking drawing upon market volatile earnings sources”. London banking group. “There is plenty of regulation in place” saidsaid the chairmanaof a a financial standpoint. While bankers and case. hence it it a high risk. non-bankers this low on on their regulators placed it higher. deposits profits were under pressure. a shrinkage of some restructuring as dust settles: rationalisation. too little of centred on on prudential issues. had the following to to “Yes. ButBut regulators are still focusing it. thisthis Banana Skinslipping Once high on risk agenda (it (it No. at No. Money laundering (24)
Once high on the the risk agenda waswas No. andand Many of respondents’ comments focused on on risk of of regulatory overkill. A UKUK banking consultant who has responded the the CSFI’s Banana Skins thing. That remains the case. It has hasbe saidsaid that bankers have never taken this with the easing of of concern. Too little regulation (29) 29. and this year they put it almost at at very bottom of their list. as as banking system piled intointo toxic assets funded cheap wholesale money andand with pressureshow thatthat toxic assets funded by by cheap wholesale money with pressure to to show capital waswas being used ‘economically’. this is is bound to require deals to be struck. Those who listed [too reaction.”
CSFI / New York CSFI E-mail: info@csfi. 21.csfi.
28. banking system will clearly have to to undergo some restructuring as the the dust settles: rationalisation. said a Swiss banker. Merger mania (28) 28. Many even pointed out that the trend was now towards demerger as combinations forged in the the heat the the crisis had be be towards demerger as combinations forged in heat of of crisis had to to unwound for competition or other reasons. andand someour our This may be be time to to embark on a major acquisition spree. A banking consultant who has responded to to CSFI’s Banana Skins survey for for many years. Too little regulation (29)
Plenty of of Plenty ‘blind spots’ ‘blind spots’ onon the the regulatory map regulatory map
TheThe persistently low position thisthis Banana Skin over the years suggests that the persistently low position of of Banana Skin over the years suggests that the riskriskregulation is seen to be too too muchit rather than too too little. said a Swiss banker.list. industry is reduced and more closely adapted to to client-driven earnings potential. andand thisbound to require deals to be struck. now look absurd. a shrinkage of capacity. Merger mania “could be induced by the the crisis”. despite obvious regulatory failures that led to to crisis. Banana Skin is is slipping fastfast with the easingconcern. but but too littleitof it centred prudential issues. One said: “During a prudential crisis. consolidation. A Luxembourg banker saidsaid that “as long the the excess capacityour our be healthy. thisthis area regulators are still focusing on on it. It to to be that bankers have never taken this riskrisk seriously as non-bankers. or at least better regulation which often amounts to the the same need more regulation. but but from a starting point that was manifestly too low. Money laundering (24) 27. despite the the obvious regulatory failures that ledthe the crisis. Merger mania (28)
This may not not the the timeembark on a major acquisition spree. TheThe banking system will clearly haveundergo there is is more to it than that. Those who listed [too much regulation] as the the top Banana Skin2004-6. 21. some of of respondents even scoffed at the the idea. from a starting point that was manifestly too low.might even Merger mania “could be induced by crisis”. the the fact that banks are more vulnerablethisthis Banana Skin from a reputational than fact that banks are more vulnerable to to Banana Skin from a reputational than a financial standpoint. One said: “During a prudential crisis. as as seriously as non-bankers. The problem was that there capital being used ‘economically’. ButBut theremore to it than that.” A Russian banker there was a temptation for for banks turnturnblind eye eye money flows during recession when temptation banks to to a a blind to to money flows during recession when deposits andand profits were under pressure. with the the risk that some of capacity. them not work. justjustthe the banking system piled much regulation] as top Banana Skin in in 2004-6. 11 11 in 2002). But now. But now.” A Russian banker saidsaid there was a less attention. or at least better regulation which often amounts to same thing. “There is plenty of regulation in place” the chairman of London banking group. there will be be an overreaction. area getsgets less attention.org. A Luxembourg banker that “as long as as excess capacity in in industry is not not reduced and more closely adaptedclient-driven earnings potential. believing it to be “got politically.uk Web: www. Many even pointed out that the trend was now respondents even scoffed at idea. YetYet therea is a vocal minority which asserts – with understandable reasons – that we there is vocal minority which asserts – with understandable reasons – that we need more regulation.C S F I / New York CSFI
27. The problem was that there waswas too much regulationplaces. It It might even be healthy. regulators placed it higher. had the following say:say: “Yes. henceis aishigh risk. That remains the in in regulation is seen to be much of of it rather than little. of their Many of the the respondents’ comments focused the the riskregulatory overkill.
. While bankers and non-bankers put put this low their list. consolidation. there will an oversurvey many years.” too much regulation in in places. at No. believing it to be “got up”up” politically. unwound for competition or other reasons.list. in 2002). and this year they put it almostthe the very bottom non-bankers are less worried. we willwill see continued risk-taking drawing upon market volatile earnings sources”. non-bankers too too are less worried. now look absurd.
either to become concentrated in the US and Caribbean. rather than on structural reforms.org. and at a different level. and specific functions such as derivatives. But they feared that this wouldn’t happen. Canadian banking consultant John Pattison feared that governments “will not act to put in place appropriately tighter regulation in a number of areas. said that “clear thinking will be needed to separate the issue of safety for UK banks from that of allowing the City to flourish. Competition from new entrants (30)
Although this Banana Skin is at the bottom of the pile.uk Web: www. and “Only a banker would argue there's too much”. Many emphasised the need for better regulation (more professional. leaving necessary work undone.uk
. One respondent feared that risky deal-making would get going again “before new regulations and controls can be introduced.csfi.org. it contains the important issue of how you stop banks becoming “too big to fail” and make markets more competitive.
London’s position at risk
A regulatory over-reaction could damage financial centres. governance. in particular the separation of traditional commercial and investment banking and insurance”. A number of respondents wanted to see a split created between safe “utility banks” serving the high street. and for gaps to be plugged in a string of areas: disclosure. international coordination. A respondent from one of the large UK banks said that EU regulations would “force financial institutions outside the UK. better informed). A respondent said that “volume and expertise may be lost from London markets as hedge funds relocate to Zug thanks to EU rules. said that “regulatory reform will concentrate on prudential and transactional problems revealed by the crisis. A strong concern was that the regulatory reform effort would flag.” A specific concern is the EU’s proposal to regulate hedge funds and bonuses. Chinese banks are emerging as a force on the world stage. senior adviser to the Observatoire de la Finance. Yes. Andrew Cornford. there are new entrants: supermarket giant Tesco announced plans to step up its banking presence in the UK as this survey got under way. hedge funds and credit rating agencies. a Swiss think tank.” Some also saw the City vulnerable to a crackdown from Brussels. Financial institutions do not like some of these proposals but for the sector as a whole and institutions of all sizes they are desirable”.” Antony Elliott.C S F I / New York CSFI
Other comments included: “More regulation will come and rightly so”. director of FairBanking in the UK. risk management. and traders move to avoid UK bonus rules. together with a failure of regulators to agree on how to reduce moral hazard across the industry.”
30. and “casino banks” dealing in markets. or increasing activity on continental Europe. particularly London. This means that a second melt-down cannot yet be ruled out”. The group corporate strategist of a large City-based institution said his concern was that “[FSA chairman Lord] Turner's thrashing of the banking sector will reduce London's position on the global stage to the detriment of the entire UK economy.
CSFI / New York CSFI E-mail: info@csfi.
. more good thing to make financial activity more contestable. The counterpart to 'too 'too to fail' fail' is 'too small to survive' which be the the result if the sins of the megato big big to is 'too small to survive' which will will be result if the sins of the megabanks are are visitedthe small”.uk Web: www. There were “few candidates for for entry – and those there are will find it difficultget get established in candidates entry – and those there are will find it difficult to to established in the the facemarket andand regulatory scepticism”. and where survivors now at small end where banks have been left left to or swim. not exciting new ones. “My concern is there not be be new entrants. said that increased protectionism Jonathan Howitt. Another observed thatthat it was large.uk
. the barriers entry willwill get higher. head of group riskrisk at Man Group. may already have been seeds of next crisis. even if few decades away.” A US US respondent agreed. not exciting new ones. particularly at the the small end where banks have been to sinksink or swim. there was a risk that remedial measures “will place a disproportionate burden on smaller banks andand financial institutions. executive director of Jordan International Bank. it. There were “few regulation gets tighter.org. executive director of detriment of competition in banking sector”.. said a respondent. crisis has shown that many banks are too too big to But the opposite is also true. In Australia. Many respondents felt thatthat one outcome be a lossloss of banking capacity.
ButBut while this might a good moment for for new competitors launch business while this might be be a good moment new competitors to to launch business models untainted by by the crisis. Antony Thomlinson of City City New regulatory costs will fall fall heavily on small banks. said that increased protectionism andand regulation would “stifle the market and product innovation that we needpullpull regulation would “stifle the market and product innovation that we need to to out out the the crisis. and where survivors now faceface competition from state-supported behemoths. particularly threatened. Hence the financial system is more concentrated than it it before the crisis. businesses”.csfi. with fewer banks and higher barriers to to entry. sown”. But the opposite is also true. head of group at Man Group. Another observed face of of market regulatory scepticism”.
CSFI / New York CSFI E-mail: info@csfi. These trends will banks. banks visited on on the small”. the the of of crisis. failed banks that attracted capital. saidsaid there was a risk that remedial measures “will place a Jordan International Bank. The counterpart disproportionate burden on smaller banks financial institutions. “It would a very institutions. evenitifisitais a few decades away. not saving dogmas of ‘free’ or ‘regulated’ markets – breaking oligopolies. Prof. it was large. but was not hopeful. As As regulation gets tighter. respondents doubted that they would have the stomach for for “My concern is there willwill not realreal new entrants. respondents doubted that they would have the models untainted the crisis.” said one. financial system is far far more concentrated thanwaswas before the crisis. These trends will encourage consolidation from which big institutions will benefit”. Small credit providers will alsoalso suffer due to liquidity issues. He He said: “The debate should about ‘open’ markets rather than to to fail”. Worse still. including specialised ones like like Luxembourg where small banks feel markets. ahh that wouldwonderful!” entry exit . stomach it. may already have been sown”. including specialised ones Luxembourg where small banks feel particularly threatened. Michael Mainelli of Z/Yen Group saidsaid the key was not reform regulation Prof. Hence the seeds of the the next crisis. Small credit providers will suffer due to liquidity issues.C S F I / New York CSFI
‘Too small to to survive’ ‘Too small survive’
The The crisis has shown that many banks are big to fail. This concern showed up up in many markets. Smaller institutions. Smaller institutions.org.” said one. “It would be be a very good thing to make financial activity more contestable. the barriers to to entry get higher. a a encourage consolidation from which big institutions will benefit”.” A respondent agreed. fail. In Australia. Another saidsaid bitterly: “The real issue unfair competition from state-owned Another bitterly: “The real issue is is unfair competition from state-owned businesses”. but was not hopeful. with fewer banks and higher barriers entry. Worse still.. said: “The debate should be be about ‘open’ markets rather than dogmas of ‘free’ or ‘regulated’ markets – breaking up up oligopolies. David Colvin. New regulatory costs will alsoalso heavily on small banks. ahh that would be be wonderful!”
The seeds of of the The seeds the next crisis next crisis ‘may already have ‘may already have been sown’ been sown’
Jonathan Howitt. Antony Thomlinson of lawyers Eversheds saidsaid that new funding requirements penalised small banks the the lawyers Eversheds that new funding requirements penalised small banks “to “to detriment of competition in the the banking sector”. David Colvin. respondent sawsaw heavier regulation “causing demise of marginal players”. Michael Mainelli of Z/Yen Group the key was not to to reform regulation but buttoughen up monopoly rules to encourage more small banks thatthat were not “too to to toughen up monopoly rules to encourage more small banks were not “too big big fail”. not saving institutions. failed banks that attracted capital. particularly Many respondents felt one outcome will will be a of banking capacity. said a respondent. The The chief executive of a Luxembourg bank feared that “many small banks in the chief executive of a Luxembourg bank feared that “many small banks in the private banking business will disappear…because clients will have to go to safer private banking business will disappear…because clients will have to go to safer banks. more entry andand exit . This concern showedin many competition from state-supported behemoths.. respondent heavier regulation “causing the the demise of marginal players”.
our our 2006 survey. TheThe remainder gave a mixed response. the the point wherewaswas now been so so sharply split winners and losers. leaving regulation andand political pressure fill fill the gap. hadhad become complacent. Unfortunately there are still many banks. This was a considerably more negative result than last last time when per per cent said “Well” and 4 considerably more negative result than time when 24 24 cent said “Well” and 4 per per cent said “Poorly”. to to point where it it now possible to differentiate very clearly between well andand badly run banks. UKUK respondent said: “The fundamental anything. A A respondent said: “The fundamental discipline of fearing bankruptcy is now severely diminished for for large institutions. remainder gave a mixed response. Unfortunately there are still many banks.uk
. most of them gave a mixed thought banks were well prepared to handle risk. and are ready to to accept lower profitability andand RoE.org. andand appreciation for. andand per per cent Only 9 cent of of respondents thought banks were well prepared. typical comment was: “The strengthen banks develop better risk controls. non-bankers the most negative.org. This. response. most of them gave a mixed response. appreciation for. 64 64 cent answered “Well”.” Those who necessary mindset to to manage key risks faced by by industry.” forward. This is is a a viable way forward. In In 2006 survey. ought to enable sector with the the necessary mindset manage the the key risks faced the the industry. A A typical comment was: “The recent crisis has has heightened the senseawareness of. if answered “Poorly” that banks had not learned the lessons from the crisis and.C S F I / New York CSFI
We We asked respondents: How well prepared youyou think the sectorto handle asked respondents: How well prepared do do think the sector is is to handle the the risks you have identified? risks you have identified?
WellWell 24% 24% Poorly Poorly 4% 4%
2009 2009 2010
Poorly WellWell Poorly 11% 11% 9% 9%
Mixed Mixed 72%72%
Mixed Mixed 80%80%
Only 9 per per cent respondents thought banks were well prepared.”
CSFI / New York CSFI E-mail: info@csfi. cent said “Poorly”. This not notviable way leaving regulation political pressure to to the gap. coupled with active regulatory oversight. believe that they did nothing wrong and that it is business usual. Although regulators ability to handle risk. various recent crisis heightened the sense of of awareness of.” Those who answered “Poorly” saidsaid that banks had not learned the lessons from the crisis and. Those who answered “Well” emphasised the the amountwork thatthat had been done to Those who answered “Well” emphasised amount of of work had been done to strengthen banks andand develop better risk controls.” usual. ought to enable the the sector with risks.csfi. discipline of fearing bankruptcy is now severely diminished large institutions. One senior possible to differentiate very clearly between well badly run banks. 11 11 cent thought them poorly prepared.
% % Well Mixed Poorly Well Mixed Poorly 12 12 81 81 7 7
Bankers are the Bankers are the most positive most positive about their ability about their ability to to handle risk handle risk
Observers Observers 4 Regulators Regulators 0
4 79 79 17 17 0 90 90 10 10
A breakdown of the the responses shows bankers be the the most positive about their A breakdown of responses shows bankers to to be most positive about their ability to handle risk. This was a thought them poorly prepared. coupled with active regulatory oversight. This. various risks. probably one third of of ones I have talked to. and are readyaccept lower profitability focusing improving risk management.uk Web: www. One senior banker said: “My impression is thatthat many banks have learned the lesson and are banker said: “My impression is many banks have learned the lesson and are focusing andand improving risk management. per per cent answered “Well”. Although no no regulators thought banks were well prepared to handle risk. if anything.” TheThe “Mixed” responses stressed the difficulty generalising about a sector which “Mixed” responses stressed the difficulty of of generalising about a sector which hadhad been sharply split intointo winners and losers. become complacent. thatthat believe that they did nothing wrong and thatisitbusiness as as have talked to. probably one thirdthe the ones I RoE. andand non-bankers the most negative.
Please describe your main concerns about the safety of financial institutions (both
individual institutions and the system as a whole) as you look ahead over the next two to three years. UK Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190
Banking Banana Skins 2010
Each year we ask senior bankers and close observers of the financial scene to describe their main worries about the banking industry as they look ahead. 5 Derby Street.csfi.uk Name Institution Position Country Replies are in confidence. Derby Street.
Please turn over
CSFI / New York CSFI E-mail: email@example.com
.C S F I / New York CSFI
CENTRE FOR THE STUDY OF FINANCIAL INNOVATION
5.org. please tick
Question 1. London W1J 7AB.uk Web: www.org. We’d be very grateful if you would take a few minutes to fill out this form. London W1J 7AB. UK Fax: +44 (0) 20 7493 0190 Email: info@csfi. but if you are willing to be quoted in our report.org. and return it to us by December 19th CSFI.
Here are some areas of risk which have been attracting attention.uk
. and what is their trend: rising. steady or falling? Use the right hand column to add comments.currencies 5 .credit spreads 4 .C S F I / New York CSFI
1=low 5=high 1 Back office Big market movements: 2 .org. How do you rate their
severity.too little 28 Retail sales practices 29 Risk management quality 30 Rogue trader 31
Rising Steady Falling
Question 3. How well prepared do you think the sector is to handle the risks you have identified?
Poorly Mixed Well
CSFI / New York CSFI E-mail: firstname.lastname@example.org 3 .too much 27 .equities 6 . Insert more risks at the bottom if you wish.org.uk Web: www.interest rates 7 Business continuation 8 Capital availability 9 Competition from new entrants 10 Conflicts of interest 11 Corporate governance 12 Credit risk 13 Derivatives 14 Emerging markets 15 Environmental risk 16 Fraud 17 Hedge funds 18 High dependence on technology 19 Liquidity 20 Macro-economic trends 21 Management incentives 22 Merger mania 23 Money laundering 24 Payment systems 25 Political interference Regulation: 26 .
ISBN 978-0-9561904-9-9.csfi. By David Lascelles. “A TOUGH NUT: basel 2. 70. May 2007. ISBN 978-0-9551811-7-7.” By Patrick Towell. ISBN 0-9551811-0-0. 81. September 2009.” A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market.” By Michael W. “WEB 2. 79.” By David Lascelles. ISBN 978-0-9561904-5-1. 74. June 2007. ISBN 0-9545208-6-6.” By David Seddon. “THE PERVERSITY OF INSURANCE ACCOUNTING: in defence of finite re-insurance. “BANKING BANANA SKINS 2006” The latest survey of risks facing the banking industry Sponsored by PricewaterhouseCoopers. “INFORMAL MONEY TRANSFERS: economic links between UK diaspora groups and recipients ‘back home’.95 £25/$50/€40 £25/$50/€40 £25/$50/€40 £25/$45/€35
£25/$40/€27 £9. ISBN 978-0-9551811-5-3. Sponsored by PricewaterhouseCoopers. By David Lascelles.” The report of the CSFI Working Group on Effective Regulation. “BANKING BANANA SKINS 2008: an industry in turmoil. 82. June 2009.95/$29. 87. By Shirley Beglinger. September 2007. 76.” The CSFI’s regular survey of banking risk at a time of industry turmoil. September 2007. July 2009.” By Antony Elliott. Amanda Scott and Caroline Oates. “INSURANCE BANANA SKINS 2007: a survey of the risks facing the insurance industry. 72. November 2007. February 2007. February 2009. ISBN 0-9545208-9-0.” Sponsored by PricewaterhouseCoopers. March 2008. 84. ISBN 978-0-9551811-9-1. insurance and the law of unexpected consequences. ISBN 978-0-9561904-4-4. “MICROFINANCE BANANA SKINS 2009: confronting crises and change. By Antony Elliott. By John Godfrey (with an appendix by Graham Cox). 73. “NOT WAVING BUT DROWNING: over-indebtedness by misjudgement.” By David Lascelles. 69. ISBN 978-0-9551811-2-2. “HOW TO STOP THE RECESSION: a leading UK economist’s thoughts on resolving the current crises. ISBN 978-0-9561904-2-0.” The CSFI’s regular survey of banking risk. By David Lascelles. 80.99/$15/€10 £25/$45/€35 £25/$45/€35 £25/$45/€35 £25/$50/€40
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For more CSFI publications. £19. “BANKING BANANA SKINS 2010: after the ‘quake. 83.” By John Kay. July 2009.0: how the next generation of the Internet is changing financial services. October 2009. By David Lascelles. 71. ISBN 978-0-9561904-3-7. “SURVIVING THE DOG FOOD YEARS: solutions to the pensions crisis.” By Michael Mainelli and Bob Giffords. ISBN 978-0-9551811-8-4. Sponsored by PricewaterhouseCoopers. Taylor. “CREDIT CRUNCH DIARIES: the financial crisis by those who made it happen. February 2009. ISBN 978-0-9551811-5-3. “FAIR BANKING: the road to redemption for UK banks. February 2010. “MICROFINANCE BANANA SKINS 2008: risk in a booming industry. September 2009. “BANANA SKINS 2005” Our latest survey of where bankers. 75. “PRINCIPLES IN PRACTICE: an antidote to regulatory prescription. March 2005. 89. “FIXING REGULATION” By Clive Briault. ISBN 0-9545208-8.” By Tim Congdon. 86. ISBN 978-0-9551811-4-6.” By Nick Carn and David Lascelles. 88. May 2008. 85. ISBN 978-0-9561904-6-8. 90. ISBN 978-0-9551811-3-9. October 2009. ISBN 0-9545208-7-4.CSFI RECENT PUBLICATIONS
92. April 2005.” City experts who lived through Big Bang discuss the lasting impact of the de-regulation of London’s securities markets Sponsored by Clifford Chance.” An industry insider defends finite re-insurance as a rational response to irrational demands.95/€22. September 2005.org. 77. ISBN 978-0-9551811-1-5. ISBN 978-0-9561904-0-6. “BIG BANG: two decades on. “GRUMPY OLD BANKERS: wisdom from crises past. “NARROW BANKING: the reform of banking regulation. please visit our website: www. April 2006.” March 2009. 78. “INSURANCE BANANA SKINS 2009: the CSFI survey of the risks facing insurers. ISBN 978-0-9561904-7-5.” By Shirley Beglinger.” By David Lascelles. ISBN 978-0-9563888-0-3. “THE ROAD TO LONG FINANCE: a systems view of the credit scrunch. regulators and journalists see the next problems coming from.uk
. February 2005. “TWIN PEAKS REvISITED: a second chance for regulatory reform.” New thinking in the pensions area (together with a nifty twist by Graham Cox). 91. ISBN 978-0-9561904-1-3.
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Registered Charity Number 1017353 Registered Office: North House. In 2009 and early 2010. we set up the following fellowship programmes: .the Generali/CSFI fellowship in Insurance. 198 High Street. and that support takes different forms. Number 2788116