Threat of recession contains risk of further bank failures

‘Banana Skins’ poll identifies top threats to banks

SINGAPORE, 30 January 2012 - The risk of another recession and a renewed banking crisis is high, according to a new survey of the dangers currently facing the global banking industry.

The CSFI’s 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 in Asia and around the world. The poll is based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries.

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. This concern is echoed by respondents in Asia Pacific, because of the risk of contagion from the eurozone crisis.

The first consequence of a crash would be large credit losses, which appear at No. 2 on the in both global’s and Asia Pacific’s top risks list, closely followed by a funding crisis with banks cut off from access to liquidity (No. 3) and fresh capital (No. 5 on Asia Pacific’s risk list).

In Asia, complicating the picture is the concern over regulatory (no.4) and political interference (No. 6) of the banking industry. Although regulatory initiatives are intended to bring about a solution to the banking crisis, they are also adding cost and distraction to banks, and making it harder for them to supply credit to the economy.

Dominic Nixon, Asia Financial Services Leader, PwC LLP Singapore, said:

“Banks are clearly worried about the impact of the continued turmoil in the eurozone. This is compounded by the threat of a liquidity crunch and continued regulatory changes – the two top concerns of banks in Singapore. Amidst such changes, banks will find it harder to be profitable. They will be forced to relook at their business and drive down costs.”

In such uncertain and stressful times, profitability is no doubt a long term issue for banks. It has emerged no.7 among the top 10 risks in Asia Pacific. Higher capital requirements, greater regulatory and compliance costs, curbs on banking activities are all impacting bank profits and their effects are likely to last for a while.

“The picture painted by this survey is very bleak,” said David Lascelles, the survey’s editor. “It shows a fragile banking system beset by threats and uncertainties.”

Chris Matten, Partner, Financial Services Industry Practice, PwC LLP Singapore, added:

“The Banana Skins Index can be read as an indicator of changing anxiety levels in the industry. This year, the index is at an all-time high, a clear sign of the unprecedented level of anxiety in the market. Banks in Singapore still appear to have a lower level of overall concern about the banking outlook, and are better prepared to face the potential risks than the world average.”

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.

That being said, the survey showed mounting concern about the prospects for China as its economy slows and its banks face growing pressures.

Responding to the concerns over China, Dominic Nixon, Asia Financial Services Leader, PwC LLP Singapore commented:

“China’s economic growth has been a counterbalance to the economic weakness and fiscal debts elsewhere in Europe and the US. With concerns over a slowdown in China’s growth, internal strains and inflating asset prices, this is really a scenario question of what-ifs.”



About the Banking Banana Skins Survey

The CSFI’s “Banana Skins” series provides periodic snapshots of the risk landscape in the financial services sector. The survey was carried out in November and December 2011, and saw responses from 710 bankers, banking regulators and close observers of the banking scene from 58 countries. 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, 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 1995.