Threat of recession contains risk of further bank failures

PwC’s ‘Banana Skins’ survey identifies top threats to banks

KUALA LUMPUR, 20 March 2012 – The risk of another global recession and a renewed banking crisis is high, according to a new survey of the dangers currently facing the world’s banking industry.

The Centre for the Study of Financial Innovation’s (CSFI) annual Banking Banana Skins survey, produced in association with PwC, puts macro-economic risk at the top of the list of 30 possible risks to banks. The survey is based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries. 12 respondents representing key banks in Malaysia also participated in the survey.

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

The top ten concerns as ranked by global respondents for the 2012 Banking Banana Skins survey are:

1.   Macroeconomic 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)
*2010 rankings in brackets

On the other hand, Malaysian respondents ranked the following as their top ten concerns:

1.   Credit risk 
2.   Macroeconomic risk 
3.   Quality of risk management 
4.   Corporate governance 
5.   Derivatives 
6.   Interest rates
7.   Human resources
8.   Profitability
9.   Capital availability
10. Liquidity

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

“Malaysia shared many of the world’s top risk concerns such as the poor state of the global economy and its likely impact on banks.  But our respondents also indicated that they feel better prepared to meet risk compared to their global counterparts, owing to the availability of external information and lessons learned from the previous crisis. They feel more resilient,” continued Ong.

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

“Respondents from the Asia Pacific were particularly concerned about the risk of contagion from the eurozone crisis, and also prospects for the region if China slows down,” said Soo Hoo Khoon Yean, Partner, PwC Malaysia.

“But Malaysia already has some pre-emptive measures to address such external risks. For example, Bank Negara has tightened guidelines on consumer lending. In spite of the cautiousness of Malaysian banks, we certainly see opportunities on the horizon. Banks will need to manage their risk factors yet be courageous enough to embrace the opportunities that the eurozone crisis presents,” concluded Soo Hoo.  



Notes to editor:

About the report

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.

About the Centre for the Study of Financial Innovation

The Centre for the Study of Financial Innovation is an independent not-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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