Credit fears transform banking risk landscape, says PwC poll

SINGAPORE , 6 May 2008 – The turmoil in the financial markets has completely transformed the risk landscape, according to the latest ‘Banking Banana Skins’ survey conducted by the CSFI in association with PricewaterhouseCoopers (PwC).

The annual poll of banking risk is dominated by concerns over current market conditions, notably the liquidity shortage and the crunch in the credit and derivative markets. The fear that these strains will lead to a global recession is high. The poll is based on the views of nearly 300 senior figures from the financial world across 38 countries, and ranks 30 risks according to their severity.

Two of the top three risks – liquidity and credit spreads – have never previously appeared in the rankings, an indication of how dramatically the risk scene has changed. The only non-financial risk in the top ten is the prospect of a regulatory over-reaction as politicians and regulators prepare to “fix” the problem.

“Unsurprisingly the credit crunch dominates the responses with liquidity, credit risk and credit spread volatility in the top three survey placing. Thoughts and insights on the credit crunch go much further than this and are threaded right through the survey. The fundamental issue is that trust has been lost across the industry, and it is likely to be a long and painful road to rebuild it,” observes Dominic Nixon, PwC Asia Financial Services Leader.

The intensity of respondents’ concerns also helped drive the Banana Skins Index, which measures anxiety levels in the financial markets, to its highest point since 1998. “Although some respondents thought there had been crisis over-reaction, the great majority were very pessimistic. This is the darkest Banana Skins survey in more than 10 years,” says David Lascelles, survey editor.

Compared to their North American and European counterparts, the respondents from Asia Pacific are more upbeat, with the region reflecting fewer concerns about the economic effects of the crisis. While the regional markets seem to be in better shape, the respondents do not expect them to escape unharmed. Access to funding is a major concern cited, particularly among emerging economy banks. Concerns about derivatives and structured products are also relatively lower.

The survey also reveals that the crisis has exposed a failure of controls within banks due to many factors including the growing complexity of finance, distorted incentive structures and insufficient regard to risk management.

“Poor risk management has clearly made a major contribution to the credit crunch, hence the rise in concerns as reflected in this survey. While banks have risk management procedures in place, they do not stress test them against sufficiently challenging scenarios. Institutions need to be capable of adapting their risk management and stress testing processes regularly to anticipate and reflect changes in the markets as they occur: those that fail to do so may suffer in difficult times,” says Mr Nixon.

Among the fast-rising risks are the threat of global recession, led potentially by a downturn in the US, and a collapse in over-priced equity markets. Concerns about the macro-economic outlook were shared by all the major markets.

The most striking declining risk is over-regulation, which headed the Banana Skins polls for the last two years but fell to 8 th place this year. But regulation is still seen as a major risk, particularly if there is a "knee jerk" reaction to the crisis.

The poll shows that only 24% of respondents thought banks are well prepared for the risks they identified compared to 64% in the previous poll. Bankers are more positive than observers and regulators about their ability to weather the storm.

The poll reflects the variations in the risk outlook as seen by different classes of respondent. Bankers thought market risks pose the strongest threats, notably sharp movements in the credit, derivatives and equity markets. Non-bankers, including regulators, put more weight on weaknesses within the banks themselves, particularly poor risk management and generous bonus systems.

While current market conditions dominate the survey, there is a marked drop in confidence over the quality of bank risk management processes reversing the trend of previous surveys. The credit crunch provides a good wake-up call for the industry to reassess the effectiveness of its risk oversight," concludes Mr Nixon.

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Soft copy of the survey report
  • For more information on this year’s survey please contact Lee Wan Ming (Direct line: (65) 6236 3973, Email: )

About the survey
Banking Banana Skins provides insights into how bankers and close observers of the banking market perceive the risks facing the industry. This is the 12 th survey that PricewaterhouseCoopers has produced with the Centre for the Study of Financial Innovation and is aimed at senior executives in the banking industry, identifying high level issues where the industry may be vulnerable.

This year, 376 executives from banks, regulators and analysts across nearly 40 countries participated in the survey which was conducted in February and March 2008

About PricewaterhouseCoopers
PricewaterhouseCoopers ( ) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

About the Centre for the Study of Financial Innovation
The centre founded in 1993, 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 1996.