Macro-economic risk top issue with global banks: CSFI and PwC survey

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‘Banana Skins’ poll identifies top threats to banks; Canada among the better prepared

TORONTO—The risk of another recession and a renewed banking crisis is top of mind with banking executives, according to a new survey of the issues currently facing the global banking industry.

The Centre for the Study of Financial Innovation ‘s (CSFI) Banking Banana Skins survey, produced in association with PwC, puts macro-economic risk at the top of the list of 30 possible risks to banks.

“While Canada may be better prepared to handle some of these risks, the issues are intertwined with the global banking system. Everyone is concerned about contagion from more troubled economies, particular in the US and Europe,” says John MacKinlay, national leader of the Financial Services Consulting practice for PwC in Canada.

Most of the top risks identified by Canadian respondents were in line with those in the global ranking: macro-economic risk, funding issues and regulation (a special PwC report on navigating through regulatory complexity is available at www.pwc.com/ca/en/banking-capital-markets/impact-of-regulatory-changes). ‘Capital availability’ is also one of Canada’s top five issues whereas two years ago it was ranked 24th. “No one wants to see an environment with tightened liquidity as this could put the brakes on our recovery,” MacKinlay says.

Canadian respondents have major concerns about regulatory risk, particularly since our banks have sought opportunities outside of Canada (and are subject to tightening regulations in other countries). The level of resources required to deal with the volume of regulation could have adverse affects in terms of competitiveness or unintended increased risks in the system, says Diane Kazarian, partner and national leader for the Banking and Capital Markets industry practice at PwC.

The poll also shows that anxiety about the outlook for banks is at its highest level since the survey was started 13 years ago. Many respondents expected to see further bank failures and nationalizations. The main cause of anxiety is the eurozone crisis which contains the threat of sovereign default by several countries. The shock of a euro collapse would hit banks not just in Europe but in all major regions of the world. Bankers in Canada, US, China, Argentina and Australia put the euro crisis at the top of their list of concerns.

The first consequence of a crash would be large credit losses, which appear at number 2 on the global list, closely followed by a funding crisis with banks cut off from access to liquidity (ranked 3rd) and fresh capital (ranked 4th).

Concern about the ability of global banks to manage their way out of the crisis is also high: weakness in corporate governance (ranked 9th) and risk management (10th) are both seen as top 10 risks. A fast-rising risk is business continuation (up from 21st to number 12) which concerns the ability of the banking system to survive the failure of a major financial situation.

For the first time, the Banana Skins survey shows the risk outlook to be better in the emerging economies than in the industrialized world. Respondents from regions such as Latin America, Africa, Asia and the Far East ranked their prospects more positively than North America and Europe thanks to stronger growth, though they felt vulnerable to global banking shocks.

What are the most pressing risks facing the banking industry?

Banking Banana Skins 2012
(2010 ranking in brackets)

World

Canada

  1. Macro-economic risk (4)
  2. Credit risk (2)
  3. Liquidity (5)
  4. Capital availability (6)
  5. Political interference (1)
  6. Regulation (3)
  7. Profitability (-)
  8. Derivatives (7)
  9. Corporate governance (12)
  10. Quality of risk management (8)
  11. Pricing of risk (9)
  12. Business continuation (21)
  13. Back office (24)
  14. Management incentives (16)
  15. Change management (28)
  16. Hedge funds (19)
  17. Interest rates (14)
  18. High dependence on technology (18)
  19. Currencies (11)
  20. Business practices (22)
  21. Equity markets (10)
  22. Emerging markets (17)
  23. Rogue trader (20)
  24. Criminality (27)
  25. Sustainability (25)
  26. Commodities (13)
  27. Fraud (15)
  28. Human resources (-)
  29. Reliance on third parties (-)
  30. Payment systems (26)
  1. Macro-economic risk (3)
  2. Liquidity (6)
  3. Regulation (5)
  4. Capital availability (24)
  5. Credit risk (1)
  6. Derivatives (7)
  7. Profitability (-)
  8. Political interference (4)
  9. Quality of risk management (2)
  10. Hedge funds (11)
  11. Back office (23)
  12. Corporate governance (16)
  13. High dependence on technology (13)
  14. Pricing of risk (12)
  15. Management incentives (8)
  16. Business continuation (20)
  17. Human resources (-)
  18. Change management (26)
  19. Interest rates (19)
  20. Currencies (10)
  21. Criminality (25)
  22. Equity markets (15)
  23. Reliance on third parties (-)
  24. Rogue trader (17)
  25. Fraud (18)
  26. Business practices (22)
  27. Emerging markets (14)
  28. Commodities (9)
  29. Sustainability (27)
  30. Payment systems (21)

The CSFI’s “Banana Skins” series provides periodic snapshots of the risk landscape in the financial services sector. As well as the banking series, the CSFI conducts surveys of the risks in insurance and microfinance. This year’s survey is based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries.

The Centre for the Study of Financial Innovation
CSFI was founded in 1993. It is an independent non-for-profit think tank based in London which researches the future of financial services. It has an affiliate in New York, New York CSFI. The CSFI has been producing regular Banana Skins surveys since 1995.

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