Index shows market anxiety returning to record level
PricewaterhouseCoopers and independent think tank, CSFI, have identified regulatory overkill as the greatest risk facing the global financial sector, for the second year running, in their annual Banking Banana Skins survey of banking risks.
As they did in the 2005 survey, respondents from 60 countries said that too much regulation was endangering the financial health of banks with its cost burden and distractions. This time, many of them added their concern about growing political interference by governments seeking to influence banks’ behaviour and obstruct free markets.
Australian respondents shared the concerns of the industrialised world about excessive regulation, indicating that efforts by governments and regulators to ease the regulatory burden have yet to hit home in the financial sector.
Michael Codling, PricewaterhouseCoopers Banking and Capital Markets Leader said, "The financial sector is throwing down a challenge to the regulators as to whether they have the right balance of cost and benefit. It’s not just the banks that suffer directly. Some of the costs are inevitably passed onto customers. Plus there is a risk that retail products are being commoditised, stifling product innovation and choice for customers. ”
In common with other major natural resource producers, such as Canada, Australian survey respondents gave a high score to the threat posed by fluctuating commodity prices, driven by energy concerns and volatile raw material prices.
However, they were less worried than the Europeans and the North Americans by credit risk and the activities of hedge funds and derivatives traders. Globally, there were greater concerns in these areas and the feeling is widespread that financial markets have had it too good for too long, and are ceasing to apply the same rigorous standards as before.
Michael Codling said, "The ready availability of credit, abundant liquidity and growing capacity in the sector are driving down margins and forcing banks all over the world to move up the risk curve to protect their revenues.”
Australian institutions are currently much more concerned about business continuity issues than their global counterparts, amongst whom the biggest current worry is an avian flu pandemic.
The top ten Banking Banana Skins identified by Australian financial institutions are:
1. Too much regulation
2. Commodities
3. Business continuation
4. Corporate governance
5. High dependence on technology
6. Macro-economic trends
7. Rogue trader
8. Derivatives
9. Hedge funds
10. Money laundering
This year’s survey coincides with a period of heightened volatility in the financial markets, and this is reflected in the Banana Skins Index, a newly compiled measure of global market anxiety based on the survey’s results. This year, the Index shows a sharp uptick, bringing it close to its record high in the wake of the dotcom market crash in 2000-2002.
Banks are seen to be better placed to handle shocks in the system. This year, 64 per cent of respondents thought institutions were moderately well prepared or better able to handle the risks, up from 57 per cent last year. Confidence was particularly strong among bankers (73 per cent), but also among regulators (63 per cent), up sharply from 39 per cent last time. Outsiders were more sceptical: only 44 per cent thought banks were well prepared.
Concerns about countries such as China and India also pushed emerging markets up the global Banana Skins rankings, from 15th place to 9th. Among other market risks, equities and interest rates gained several places.
Another area of rising concern internationally is the banks growing dependence on technology for the safety and soundness of their business. With the growing sophistication of hackers and the vulnerability of distributed systems to attack, there are questions about the ability of banks to manage their increasingly hi-tech operations.
However, some previously high-ranking global Banana Skins have eased. In the area of financial crime, both fraud and money laundering fell several places, mainly because of the number of initiatives now in place to deal with these issues. The level of concern about the general economic outlook also eased: although many respondents saw signs of fragility in the global economy, the broad feeling was that growth would be maintained.
The top thirty global Banking Banana Skins (with 2005 position in brackets) are:
1. Too much regulation (1)
2. Credit risk (2)
3. Derivatives (4)
4. Commodities (14)
5. Interest rates (12)
6. High dependence on technology (8)
7. Hedge funds (5)
8. Corporate governance (3)
9. Emerging markets (15)
10. Risk management techniques (9)
11. Fraud (6)
12. Equities (18)
13. Currencies (7)
14. Macro-economic trends (10)
15. Political shocks (22)
16. Conflicts of interest (-)
17. Banking market overcapacity (20)
18. Money laundering (13)
19. Merger mania (27)
20. Legal risk (17)
21. Business continuation (19)
22. Retail sales practices (23)
23. Insurance sector problems (11)
24. Back office (26)
25. Environmental risk (28)
26. Management incentives (21)
27. Rogue trader (24)
28. Competition from new entrants (29)
29. Payment systems (25)
30. Too little regulation (30)
David Lascelles, the CSFI’s co-director and report author, said: "This year’s results tell us that people are becoming more anxious about the financial outlook, and the damage that this could do to banks. But we are not yet at the point where risks are becoming life-threatening.”
Notes to Editor
1. The CSFI (Centre for the Study of Financial Innovation) is a non-profit think-tank, founded in 1993, which looks at challenges to and opportunities for the financial sector. It has an affiliate organisation in New York, the New York CSFI.
2. The Banking Banana Skins survey was conducted in April and May 2006, and is based on 468 responses from 60 countries.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using Connected Thinking to develop fresh perspectives and practical advice.
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