Singapore banks point to derivatives, back office and interest rates as next banking disasters

1. Singapore, 14 July 2006 – Singapore banks are concerned with operational risk issues: the back office, technological dependence and business continuation. Main concerns on market risk lay in the areas of credit risk, derivatives and rising interest rates. Overall, local banks are less concerned than their counterparts from Europe and North America with excessive regulation, according to a recent poll of 468 respondents from 60 countries.

2. Globally, regulatory overkill is identified as the greatest risk facing the financial sector for the second year running by the CSFI’s Banking Banana Skins survey of banking risks, in association with PricewaterhouseCoopers (PwC). Respondents say that too much regulation is endangering the financial health of banks with its cost burden and distractions, as they did in the 2005 survey. But this time, many of them add their concern about growing political interference by governments seeking to influence banks’ behaviour and obstruct free markets. 3. The survey results suggest that efforts by governments and regulators to ease the regulatory burden have yet to bear fruit. Dominic Nixon, PwC Asia Financial Services Leader, says, “The financial sector is again throwing down a challenge to the regulators as to whether they have the right balance of cost and benefit”.

4. 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 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.

5. “Risks come and go, while some are perennial. This index reveals the risks closest to the banks’ hearts and shows how their concerns evolved over the last decade. The 1990s were dominated by strategic issues: new types of competition and technologies, dramatic developments such as EMU, the Internet and Y2K. Many of these subsequently faded, to be replaced by economic and political risks and, more recently, governance and regulation. Striking is the disappearance of 1990s concerns with infrastructure issues (e.g. back office). Instead, the focus has shifted to derivatives and hedge funds. Notable this year is the emergence of commodities and emerging markets as Top Ten concerns,” Mr Nixon provides a snapshot of banks’ top 10 fears between 1996 and 2006.

6. Top of the sharp risers in this year’s Banana Skins are commodity markets (up from 14th place to 4th) on the back of energy concerns and volatile raw material prices. Concerns about countries such as China and India also push emerging markets up the list, from 15th place to 9th. Among other market risks, equities and interest rates gain several places.

7. As in previous years, concerns about credit risk, derivatives and hedge funds also feature high in the table. 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. The ready availability of credit, abundant liquidity and growing capacity in the sector are driving down margins and forcing banks to take ever greater risks to protect their revenues.

8. Another area of rising concern 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.

9. However against that, some previously high-ranking Banana Skins have eased: both fraud and money laundering fall several places, mainly because of the number of initiatives now in place to deal with these issues. Concern about the general economic outlook also eased: although many respondents see signs of fragility in the global economy, the broad feeling is that growth would be maintained.

10. Banks are also seen to be better placed to handle shocks in the system. This year, 64% of respondents thought institutions are moderately well prepared or better able to handle the risks, up from 57% last year. Confidence is particularly strong among bankers (73%), but also among regulators (63%), up sharply from 39% last time. Outsiders are more sceptical: only 44% thought banks are well prepared.

Banking Banana Skins 2006
(Singapore Respondents)

1. Derivatives
2. Back office
3. Interest rates
4. High dependence on technology
5. Business continuation
6. Corporate governance
7. Credit risk
8. Emerging markets
9. Risk management techniques
10. Hedge funds
Banking Banana Skins 2006
(2005 position in brackets)

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. David Lascelles, the CSFI’s co-director who wrote the report, says: “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”.

- ENDS -


Notes:

Media Contacts
Lee Wan Ming (Direct line: (65) 6236 3973, Mobile: (65) 9663 6736, wan.ming.lee@sg.pwc.com )
Ryp Yong (Direct line: (65) 6236 3960, Mobile (65) 9750 6292, ryp.yp.yong@sg.pwc.com )

Other survey highlights
Banana Skins: the Top Ten 1996-2006
1996
1.Poor management
2.Bad lending
3.Derivatives
4.Rogue trader
5.Excessive competition
6.Emerging markets
7.Macro-economic threats
8.Back office failure
9.Technology foul-up
10.Fraud
1997
1.Poor management
2.EMU turbulence
3.Rogue trader
4.Excessive competition
5.Bad lending
6.Emerging markets
7.Fraud
8.Derivatives
9.New products
10.Technology foul-up
1998
1.Poor risk management
2.Y2K
3.Poor strategy
4.EMU turbulence
5.Regulation
6.Emerging markets
7.New entrants
8.Cross-border competition
9.Product mis-pricing
10.Grasp of technology
2000
1.Equity market crash
2.E commerce
3.Asset quality
4.Grasp of new technology
5.High dependence on tech.
6.Banking market o’-capacity
7.Merger mania
8.Economy overheating
9.Comp. from new entrants
10.Complex fin. instruments
2002
1.Credit risk
2.Macro-economy
3.Equity markets
4.Complex financial instruments
5.Business continuation
6.Domestic regulation
7.Insurance
8.Emerging markets
9.Banking market over-capacity
10.International regulation
2003
1.Complex financial instruments
2.Credit risk
3.Macro economy
4.Insurance
5.Business continuation
6.International regulation
7.Equity markets
8.Corporate governance
9.Interest rates
10.Political shocks
2005
1.Too much regulation
2.Credit risk
3.Corporate governance
4.Derivatives
5.Hedge funds
6.Fraud
7.Currencies
8.High dependence on tech.
9.Risk management techniques
10.Macro-economic trends
2006
1.Too much regulation
2.Credit risk
3.Derivatives
4.Commodities
5.Interest rates
6.High dependence on technology
7.Hedge funds
8.Corporate governance
9.Emerging markets
10.Risk management techniques


Soft Copy of the Survey Report
· For more information on this year’s survey please contact Lee Wan Ming (Direct line: (65) 6236 3973, Mobile: (65) 9663 6736, wan.ming.lee@sg.pwc.com)

About the survey
1. The Banking Banana Skins survey was conducted in April and May 2006, and is based on 468 responses from 60 countries.
The breakdown of respondent by type:
%
Bankers
269
57
of which - chairmen/directors/CEOs
47
- risk officers
100
- line managers
80
Non-bank businesses
57
13
Regulators
24
5
Observers
118
25
Total
468
100

2. 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.


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