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.