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Banking Banana Skins 2012
The system in peril
Centre for the Study of Financial Innovation
CSFI
In association with
The CSFI survey of bank risk
C S F I / New York CSFI

The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open markets. Trustees Minos Zombanakis (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Brian Pearse Staff Director Andrew Hilton Co-Director Jane Fuller Senior Fellow David Lascelles Programme Coordinator Lisa Moyle Governing Council Sir Brian Pearse (Chairman) Sir David Bell Geoffrey Bell Rudi Bogni Philip Brown Peter Cooke Bill Dalton Sir David Davies Abdullah El-Kuwaiz Prof Charles Goodhart John Heimann John Hitchins Rene Karsenti Henry Kaufman Sir Andrew Large David Lascelles Robin Monro-Davies Rick Murray John Plender David Potter Mark Robson David Rule Sir Brian Williamson Sir Malcolm Williamson (designate) Peter Wilson-Smith Minos Zombanakis
CSFI publications can be purchased through our website www.csfi.org or by calling the Centre on +44 (0) 207 493 0173
Published by Centre for the Study of Financial Innovation (CSFI) Email: info@csfi.org Web: www.csfi.org ISBN: 978-0-9570895-1-8 Printed in the United Kingdom by Heron, Dawson & Sawyer
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

NUMBER ONE HUNDRED AND FIVE Banking Banana Skins 2012 FEBRUARY 2012
Preface
One may carp at the predictive power of our Banana Skins surveys. But there is no denying that they paint a very powerful picture of what financial insiders (practitioners, regulators, jaundiced observers) believe to be the most pressing problems of the day. Two years ago, it was the threat of political interference in the business of banking, followed by credit risk (We lose money the oldfashioned way we lend it) and, bizarrely, too much regulation. Now, it is: macro-economic risk defined as a fragile global economy, poised yet again on the brink of recession; credit risk; liquidity notably the difficulty that banks, particularly in Europe, are having funding themselves; and the availability, or not, of capital which pretty much guarantees that banks response to pressure to boost their own funds (Basel 3 et al) will lead to a shrinking of their balance sheets and the exacerbation of the economic downturn we all seek to avoid.
It is all sad, gloomy and predictable. As this issue of Banana Skins makes clear, risk in the financial system is now at a 13-year high, and anxiety levels are unprecedented. Some of this is what we economists call exogenous, i.e. out of our control. But one of the lessons that this survey teaches us, yet again, is the danger of unintended consequences. A few years ago, Basel 3 probably looked like a good idea. Now, it is clear that it is coming along at precisely the wrong time virtually guaranteeing that big banks will not be able (even if willing) to play the role of economic locomotive that politicians demand of them. It is still heretical to say it out loud, but one wonders whether the core idea that the best way to regulate banks is through tougher capital ratios needs to be fundamentally rethought, i.e. abandoned. This years Banana Skins survey is, as always, a good read and reflects the considered views of people who genuinely run the global financial system. Which (in my view, at least) makes it odd and not a little disturbing that the risk embodied in payment systems weighs in at No 30, bottom of our list. That said, I do think that the references to China are deeply significant: the problems of its banks, falling export orders, its over-dependence on the West (an interesting twist) etc. My guess is that in the next survey, China will merit a section all to itself. In the meantime, my thanks to David Lascelles for putting together what has become the CSFIs signature report this time, bigger (and better) than ever. Thanks also to our friends at PwC for sponsoring it and, as important, for allowing us the editorial freedom to say whatever we like about the financial sector that succours us all. I hope that our survey helps the banks avoid some of the risks that appear to be gathering on the horizon. At the least, it should make us all question some of our most cherished assumptions about how banks are run, what their role in society should be, and how (if at all) they should be regulated. Andrew Hilton Director, CSFI

Banking Banana Skins 2012 Banking Banana Skins 2012
Foreword Foreword
Welcome to Banking Banana Skins 2012, a unique survey of the risks facing the industry, which has been produced by the CSFI in association with PwC. Were delighted to be Banana continuing our support for this initiative. The Banana Skins reports provide Welcome to Banking Skins 2012 , a unique survey of the risks facing the industry, which valuable into concerns at the with top of the boardroom agenda, and how these change has been insights produced by the the risk CSFI in association PwC. over time. Not surprisingly, macro-economic risk heads this latest ranking, but it is worth noting that it is seen as bigger risk today than any of the from past Were delighted to be continuing our support for top thisrisks initiative. The surveys. Banana Skins reports provide valuable insights into the risk concerns at the top of the boardroom agenda, and how these change This is theNot third time this survey has come risk out heads against the backdrop of but a crisis for financial over time. surprisingly, macro-economic this latest ranking, it is worth noting services, starting in May 2008 in the wake stages thesurveys. credit crisis, then again in the that it is seen as bigger risk today than any of of the the earlier top risks fromof past post-Lehman period, and now with the world facing new uncertainties. While the latest set of risks may the same origins the earlier ones,out thisagainst survey the shows that many people them as This have is the third time this as survey has come backdrop of a crisis view for financial potentially more in challenging. The from banking crisis to credit a broader ofagain economic, services, starting May 2008 in the move wake of the a earlier stages of the crisis,set then in the regulatory and political risks new set of challenges to bank While management, especially as post-Lehman period, and nowpresents with the a world facing new uncertainties. the latest set of risks banks must, insame manyorigins cases, respond to pressures outside their immediate control. may have the as the earlier ones, this survey shows that many people view them as potentially more challenging. The move from a banking crisis to a broader set of economic, The risks highlighted in risks this report areafundamental and long term in nature, and include the lack regulatory and political presents new set of challenges to bank management, especially as of growth in in many developed economies, the eurozone the potential for some form of Tobin banks must, many cases, respond to pressures outsidecrisis, their immediate control. tax, increased costs on banks through additional capital requirements, the lack of confidence in the interbank and the list goes on. the risk is that things get before they getthe better. The risks markets, highlighted in this report are And fundamental and long term inworse nature, and include lack of growth in many developed economies, the eurozone crisis, the potential for some form of Tobin While it is true that on many banks have additional made significant to their organisations and the tax, increased costs banks through capital changes requirements, the lack of confidence inway the they run their businesses since the last crisis, the fragile confidence in the sector is further interbank markets, and the list goes on. And the risk is that things get worse before they get better. underlined by the presence of credit risk, liquidity and capital availability among the top four Banana identified by this survey. It is significant also clear that much still to be and done: banks While it Skins is true that many banks have made changes towork their has organisations the way remain both unpopular and under As ever, confidence there is a richness of insight and they run their businesses since the the lastspotlight. crisis, the fragile in the sector is further perceptive threadedof through report, which will repay availability a careful read. underlined comment by the presence credit the risk, liquidity and capital among the top four Banana Skins identified by this survey. It is also clear that much work has still to be done: banks Risk management is about choices and we hope that As this ever, survey helps the debate. remain both unpopular and under the spotlight. there isinform a richness of insight and perceptive comment threaded through the report, which will repay a careful read. Andrew Gray Partner, PwC Risk management is about choices and we hope that this survey helps inform the debate. Andrew Gray Partner, PwC
This report was written by David Lascelles Cover by Joe Cummings This report was written by David Lascelles Cover by Joe Cummings

About this survey

This survey describes the risks currently facing the global banking industry, as seen by a wide range of bankers, banking regulators and close observers of the banking scene around the world. The survey was carried out in November and December 2011, and received 710 responses from individuals in 58 countries. The questionnaire (reproduced in the Appendix) was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the financial system over the next 2-3 years. In the second, they were asked to score a list of potential risks, or Banana Skins, selected by a CSFI/PwC panel. In the third, they were asked to rate the preparedness of financial institutions to handle the risks they identified. Replies were confidential, but respondents could choose to be named. The breakdown of respondent by type was:
Regulators 3% Observers 28%
Bankers 69%
The responses by country were as follows:

Argentina Australia Austria Bahrain Belgium Bermuda Bosnia & Herz. Brazil Canada China Colombia Cyprus Czech Rep. Denmark Ecuador Finland France Germany Ghana 11 13 6 1 6 1 1 2 41 23 1 5 10 1 1 8 1 6 1 Gibraltar Greece Guernsey Hong Kong India Indonesia Isle of Man Italy Japan Jersey Luxembourg Malaysia Mauritius Multinational Namibia Netherlands New Zealand Nigeria Panama Philippines 1 1 1 6 6 1 5 7 3 9 23 12 1 11 4 19 22 2 1 4 Poland Portugal Romania Russia Singapore Slovakia South Africa Spain Sudan Sweden Switzerland Thailand Turkey UAE Uganda UK Ukraine USA Zambia 6 1 19 13 8 8 7 1 1 20 7 4 38 6 1 245 4 41 2
Banking Banking Banana Banana Skins Skins 2012 2012 C S F I / New York CSFI
Summary Summary
The The fragility fragility of of the the world world economy economy isis the the top top threat threat to to banks banks
This This report report describes describes thethe risk risk outlook outlook forfor thethe banking banking industry industry at the at the turn turn of of Banking Banking Banana Banana Skins Skins thethe year year 2012 2012 a a time time of of 2012 2012 unprecedented unprecedented stress stress in in thethe financial financial (2010 (2010 ranking ranking in brackets) in brackets) markets. markets. The The findings findings areare based based on on responses responsesfrom frommore morethan than700 700 1 Macro-economic 1 Macro-economic risk risk (4)(4) bankers, bankers, regulators regulators and and close close 2 Credit 2 Credit risk risk (2)(2) observers observers of of thethe banking banking scene scene in in 58 58 3 Liquidity (5)(5) 3 Liquidity countries. countries.
4 Capital availability (6)(6) 4 Capital availability 6 Regulation (3)(3) 6 Regulation 7 Profitability (-)(-) 7 Profitability 8 Derivatives (7)(7) 8 Derivatives 9 Corporate governance (12) 9 Corporate governance (12) 10 10 Quality of risk management (8)(8) Quality of risk management 11 11 Pricing of risk (9)(9) Pricing of risk 12 12 Business continuation (21) Business continuation (21) 13 13 Back office (24) Back office (24) 14 14 Management incentives (16) Management incentives (16) 15 15 Change management (28) Change management (28) 16 16 Hedge funds (19) Hedge funds (19) 17 17 Interest rates (14) Interest rates (14) 18 18 High dependence on on technology (18) High dependence technology (18) 19 19 Currencies (11) Currencies (11) 20 20 Business practices (22) Business practices (22) 21 21 Equity markets (10) Equity markets (10) 22 22 Emerging markets (17) Emerging markets (17) 23 23 Rogue trader (20) Rogue trader (20) 24 24 Criminality (27) Criminality (27) 25 25 Sustainability (25) Sustainability (25) 26 26 Commodities (13) Commodities (13) 27 27 Fraud (15) Fraud (15) 28 28 Human resources (-)(-) Human resources 29 29 Reliance on on third parties (-)(-) Reliance third parties 30 30 Payment systems (26) Payment systems (26)
In In thethe opinion opinion of of these these respondents, respondents, much much thethe greatest greatest threat threat facing facing thethe banking banking industry industry is is thethe fragility fragility of of the the world world economy economy . If . If there there is is a a return return to to recession, recession, it is it is very very likely likely that that banks banks will will suffer suffer severe severe credit credit losses, losses, and and that that more more of of them them will will fail fail or have or have to be to be nationalised. nationalised. The The outlook outlook is is terrible terrible was was thethe comment comment from from a director a director of of a large a large UK UK bank, bank, reflecting reflecting a a strength strength of of concern concern that that was was shared shared in in all all thethe major major regions regions surveyed: surveyed: North North America, America,Europe Europeand andthetheAsiaAsiaPacific, Pacific, plus plus input input from from Latin Latin America. America. The The Banana Banana Skins Skins Index, Index, a a measure measure of of anxiety anxiety levels levels in in thethe financial financial sector, sector, is at is its at its highest highest since since it was it was started started 13 13 years years ago. ago. The The main main causes causes areare obvious: obvious: thethe crisis crisis in in thethe eurozone eurozone and and mounting mounting debt debt problems problems in in many many of of the the worlds worlds largest largest economies economies (No. (No. 2),2), linked linked to weak to weak banking banking systems systems and and a a scarcity scarcity of of credit. credit.
5 Political interference (1)(1) 5 Political interference
Concern Concern about about bank bank funding funding isis on on the the rise rise again again
Specific Specific banking banking risks risks lie lie in in thethe area area of offunding. funding.Concerns Concernsabout aboutthethe adequacy adequacy of of liquidity liquidity (No. (No. 3) 3) and and capital capital (No. (No. 4) 4) areare on on thethe rise rise again again due due to to thethe low low level level of of confidence confidence in in (and (and among) among) banks. banks. The The banking banking sectors sectors ability ability to to sustain sustain profitability profitability (No. (No. 7) 7) in in a difficult a difficult and and changing changing environment environment is is also also in in doubt. doubt. Complicating Complicating thethe picture picture is is thethe high high level level of of political political interference interference (No. (No. 5) 5) and and regulation regulation (No. (No. 6) 6) in in thethe banking banking industry. industry. Although Although these these efforts efforts areare intended intended to to bring bring about about a solution a solution to to thethe banking banking crisis, crisis, bankers bankers say say they they areare also also adding adding cost cost and and distraction distraction to the to the business, business, and and making making it harder it harder forfor them them to supply to supply credit credit to the to the economy. economy.
5 5
C S F I / New York CSFI Banking Banking Banana Banana Skins Skins 2012 2012
Concern Concern about about thethe ability ability of banks of banks to manage to manage thethe complexities complexities of modern of modern banking banking is is also also high: high: weakness weakness in corporate in corporate governance governance (No. (No. 9) 9) and and risk risk management management (No. (No. 10)10) areare both both seen seen as Top as Top Ten Ten risks. risks. A fast-rising A fast-rising risk risk is business is business continuation continuation (up(up from from No. No. 21 21 to No. to No. 12), 12), i.e.i.e. thethe ability ability of the of the banking banking system system to survive to survive thethe failure failure of of a major a major financial financial institution. institution. Similarly, Similarly, there there is is strong strong concern concern about about change change management management (up(up from from No. No. 28 28 to No. to No. 15): 15): thethe capacity capacity of banks of banks to handle to handle thethe huge huge agenda agenda of of restructuring restructuring which which is being is being imposed imposed on on them them by by new new regulation. regulation. Back Back office office risk risk (up(up from from No. No. 24 24 to No. to No. 13)13) hashas also also risen risen sharply sharply because because of the of the stresses stresses on on systems systems created created by by thethe crisis crisis and and thethe heavy heavy volume volume of new of new regulation. regulation. In the In the banking banking markets, markets, derivatives derivatives (No. (No. 8) continue 8) continue to be to be seen seen as a ashigh a high risk risk area, area, though though activity activity is is expected expected to to decline. decline. Hedge Hedge funds funds (No. (No. 16), 16), another another earlier earlier whipping whipping boy, boy, come come outout as as a middling a middling risk. risk. ByBy contrast, contrast, market-related market-related risks risks areare seen seen to to be be relatively relatively moderate: moderate: little little potentially potentially damaging damaging movement movement is seen is seen in in currencies, currencies, despite despite thethe euro, euro, (No.19), (No.19), interest interest rates rates (No. (No. 17), 17), and and equity equity markets markets (No. (No. 21)21) because because banks banks have have thethe means means to protect to protect themselves themselves against against volatility. volatility.
Back Back offices offices are are under under strain strain
Big Big movers movers

RISING RISING RISKS RISKS
Macro-economic Macro-economic risk: risk: worries worries about about a new a new global global recession recession Liquidity: Liquidity: resurgent resurgent fears fears of a ofliquidity a liquidity crunch crunch Capital Capital availability: availability: risks risks of a ofshortage a shortage Corporate Corporate governance: governance: ability ability to manage to manage risk risk Business Business continuation: continuation: inadequacy inadequacy of crisis of crisis recovery recovery plans plans Back Back office: office: systems systems could could be be overwhelmed overwhelmed
FALLING FALLING RISKS RISKS

Interest Interest rates: rates: little little volatility volatility foreseen foreseen Emerging Emerging markets: markets: in better in better shape shape than than developed developed markets markets Payment Payment systems: systems: standing standing up up well well to the to the stresses stresses
Despite Despite thethe strength strength of anti-bank of anti-bank feeling feeling generated generated by by thethe crisis, crisis, reputational reputational issues issues and and wider wider questions questions about about thethe social social sustainability sustainability of banks of banks come come low low down down thethe listlist (No. (No. 25). 25). The The risks risks associated associated with with management management incentives incentives areare only only seen seen as as middling middling (No. (No. 14), 14), with with banking banking respondents respondents describing describing concerns concerns as as wildly wildly exaggerated. exaggerated. Although Although thethe need need forfor banks banks to rebuild to rebuild trust trust is widely is widely recognised, recognised, thethe risks risks to bank to bank survival survival in this in this area area areare seen seen to be to be low. low. The The risk risk that that thethe low low reputation reputation of of banks banks will will drive drive away away talented talented human human resources resources is is also also low low (No. (No. 28). 28). Criminality Criminality risks risks (fraud, (fraud, data data theft, theft, rogue rogue traders, traders, cyber cyber attack) attack) areare seen seen as as manageable, manageable, though though they they may may rise rise in difficult in difficult economic economic conditions. conditions. Certain Certain operational operational risks risks such such as as reliance reliance on on third third parties parties (i.e. (i.e. offshoring) offshoring) and and payment payment systems systems come come at the at the bottom bottom of the of the list. list. Although Although always always a potential a potential source source of trouble, of trouble, thethe prevailing prevailing view view is that is that these these have have stood stood up up well well in the in the crisis. crisis. The The risks risks in emerging in emerging markets markets areare seen seen to be to be falling falling (down (down from from No. No. 17 17 to No. to No. 22)22) mainly mainly because because thethe sector sector is seen is seen to to be be in in better better shape shape than than industrial industrial countries countries (though (though there there areare worries worries about about China). China). Emerging Emerging markets markets do,do, however, however, have have concerns concerns of their of their own own about about global global economic economic prospects, prospects, and, and, forfor thethe first first time time in this in this survey, survey, wewe include include a view a view of the of the world world from from their their perspective. perspective. A A breakdown breakdown of of responses responses by by type type shows shows a high a high level level of of agreement agreement among among bankers, bankers, non-bankers non-bankers and and regulators regulators about about thethe risks risks facing facing banks: banks: all all three three putput thethe
Emerging Emerging market market risks risks are are among among the the few few that that are are falling falling
6 6
macro-economic macro-economic TheThe economic economic situation, situation, credit credit riskrisk andand liquidity liquidity riskrisk in their in their top top three. three three. three availability availability of capital, of capital, the e the volatility e volatility of derivative of derivative markets markets andand the the outlook outlook for for banking banking profitability profitability are are alsoalso common common concerns. concerns. TheThe big big difference difference top top level level between between them them is the is the perception perception of regulatory of regulatory andand political political risk: risk: the the bankers bankers raterate thisthis very very high, high, while while non-bankers non-bankers put put it at it the at t t the middle middle andand regulators regulators at the at the bottom bottom of of their their lists. lists.
The The risks risks are are global global
main main regions regions surveyed. surveyed. , concerns , concerns are are alsoalso strikingly strikingly similar similar in the in the Geographically Geographically All All of them of them view view the the macro-economy, macro-economy, as major as major risks. risks. Concern Concern economy, economy, credit credit andand liquidity liquidity about about regulatory regulatory riskrisk is strongest is strongest st in st North in North America America followed followed by Asia by Asia Pacific Pacific andand Europe. Europe. There There is also is also little little to distinguish to distinguish the the identified identified by industrial by industrial and and types types of risk of risk dangers dangers currently currently facing facing emerging emerging countries, countries, underlining underlining the the global global nature nature of the of the banks, banks, though though emerging emerging markets markets are are more more confident confident ident ident than than industrial industrial countries countries about about their their economic economic prospects. prospects. banking banking We We asked asked respondents respondents how how well well prepared prepared they they thought thought the the Preparedness. Preparedness. On On a scale a scale of 1 of (poorly) 1 (poorly) to 5to 5 industry industry waswas to handle to handle the the risks risks they they hadhad identified. identified. (well) (well) they they gave gave a score a score of 2.96, of 2.96, , slightly , slightly above above middling, middling, the the broad broad message message being being thatthat banks banks are are trying trying but but could could do better. do better.
Banana Skins Index

5 4.5 Score 4 3.5 3
Equity mkts Poor risk mgt Macro-economic risk Political interference
Credit risk Derivatives
Liquidity Too much regulation
The The Banana Banana Skins Skins Index Index is is at at anan all-time all-time high high
2.5 2
98 00 02 04 06 08 10 19 20 20 20 20 20 20
Top risk Avg.of all risks
TheThe Banana Banana Skins Skins Index Index tracks tracks survey survey responses responses over over time time andand can can be read be read as an as an score score (out(out of of indicator indicator of changing of changing anxiety anxiety levels. levels. TheThe upper upper lineline shows shows the the a average a average 5) given 5) given to the to the top top risk, risk, andand the the bottom bottom lineline shows shows the the average average of all of the all the risks. risks. This This year, year, both both indicators indicators are are at record at record highs, highs, a clear a clear sign sign of the of the unprecedented unprecedented level level of of anxiety anxiety in the in the market. market.
7 7
20
12
Who Who said said what what

A breakdown A breakdown of the ofTop the Ten Top responses Ten responses by type by type shows shows different different levels levels of concern. of concern. Bankers Bankers commercial commercial and and investment investment bankers bankers
1 2 3 4 5 6 7 8 9 10
Bankers, Bankers, observers observers and and regulators regulators agree agree on on the the bigbig risks, risks, but but differ differ on on the the detail detail
The The bankers bankers chiefchief concerns concerns centre centre on the on the operating operating environment: environment: the state the state of the ofglobal the global economy, economy, rising rising debt,debt, particularly particularly on the on the Credit 3 Credit risk risk sovereign sovereign front, front, and the andpossibility the possibility of a of new a new Capital 4 Capital availability availability liquidity liquidity crunch. crunch. The The availability availability of capital of capital Regulation 5 Regulation and profit and profit prospects prospects are also are also high high on the onlist. the list. The The bankers bankers response response is especially is especially notable notable Profitability 6 Profitability for its for concern its concern with with the negative the negative impact impact of of Political 7 Political interference interference regulation, regulation, and growing and growing political political interference interference Derivatives 8 Derivatives in the in business. the business. But they But they also also recognise recognise the the Corporate 9 Corporate governance governance needneed for for stronger stronger governance governance and and risk risk management. management. 10 Quality Quality of risk of management risk management
Liquidity 2 Liquidity
Macro-economic 1 Macro-economic risk risk
Observers Observers non-bankers, non-bankers, analysts, analysts, consultants, consultants, academics academics
1 2 3 4 5 6 7 8 9 10
Observers Observers of the of banking the banking industry industry are the are the only only group group which which puts puts credit credit risk at risk the attop theof top of the list, the list, believing believing that that banks banks are acutely are acutely Liquidity 3 Liquidity vulnerable vulnerable to the tosovereign the sovereign debt,debt, housing housing and and Derivatives 4 Derivatives consumer consumer loan loan markets. markets. TheyThey also also share share Capital 5 Capital availability availability bankers bankers concerns concerns with with funding funding issues. issues. But But they they are more are more worried worried than than bankers bankers about about Political 6 Political interference interference potential potential losses losses from from derivative derivative products products and and Quality 7 Quality of risk of management risk management the mispricing the mispricing of risk. of risk. While While they they also also see see Corporate 8 Corporate governance governance political political interference interference as a as risk, a risk, they they do not do not Profitability 9 Profitability share share bankers bankers intense intense concern concern about about excessive excessive regulation. regulation. 10 Pricing Pricing of risk of risk
Credit 1 Credit risk risk
Regulators Regulators supervisors, supervisors, government government officials officials

1 2 3 4 5 6 7 8 9 10
The The regulators regulators top top threethree concerns concerns are are identical identical to the to bankers, the bankers, showing showing a strong a strong Credit 2 Credit risk risk alignment alignment of views of views on the on near-term the near-term risk risk Liquidity 3 Liquidity outlook. outlook. TheyThey are also are also concerned concerned about about the the Business 4 Business continuation continuation operating operating strength strength of of banks: banks: capital, capital, Capital 5 Capital availability availability profitability profitability and and backback office office management. management. But But high high on their on their list is listthe is institutional the institutional Profitability 6 Profitability strength strength of banks, of banks, and and their their plans plans for for Corporate 7 Corporate governance governance business business continuation continuation (crisis (crisis recovery). recovery). Quality 8 Quality of risk of management risk management Regulators Regulators also also show show moremore concern concern than than Derivatives 9 Derivatives otherother groups groups about about the economic the economic outlook outlook for for emerging emerging markets. markets. 10 Emerging Emerging markets markets
Banking Banking Banana Banana Skins Skins 2012 2012

North North America America
1 2 3 4 5 6 7 8 9 10
The The top concern top concern in the in US the and US Canada and Canada is the is the state state of the of world the world economy, economy, in particular in particular the the Regulation 2 Regulation risk risk of contagion of contagion from from the the eurozone eurozone debt debt Political 3 Political interference interference crisis. crisis. But But the the response response is notable is notable for the for the Liquidity 4 Liquidity intense intense focus focus on the on the negative negative impact impact of of Credit 5 Credit risk risk regulation regulation and and growing growing political political interference interference in the in the banking banking business. business. Although Although this this is is Derivatives 6 Derivatives largely largely a US a preoccupation, US preoccupation, it is it also is also present present Profitability 7 Profitability in Canada. in Canada. Credit Credit risk risk is a is generally a generally lower lower Capital 8 Capital availability availability concern, concern, withwith bothboth economies economies feeling feeling that that Quality 9 Quality of risk of management risk management theythey maymay be past be past the worst the worst on domestic on domestic bad bad debts. debts. 10 Pricing Pricing of risk of risk
Risks Risks are are remarkably remarkably similar similar across across the the regions regions
Europe Europe
1 2 3 4 5 6 7 8 9 10
Concern Concern about about the the sovereign sovereign debt debt crisis crisis dominates dominates the responses the responses fromfrom Europe, Europe, bothboth as to as its toscale its scale and and poorpoor handling. handling. Fears Fears of a of a Liquidity 3 Liquidity renewed renewed recession recession are are strong, strong, withwith bank bank Capital 4 Capital availability availability funding funding a big a big issue issue in several in several countries, countries, Profitability 5 Profitability particularly particularly those those at the at the eye eye of the of the debtdebt storm. storm. Europeans Europeans share share North North American American Political 6 Political interference interference concerns concerns about about the growth the growth of regulation of regulation and and Regulation 7 Regulation political political interference interference in banking, in banking, though though not not Derivatives 8 Derivatives as intensely. as intensely. ThisThis is the is only the only geographical geographical Corporate 9 Corporate governance governance group group which which sees sees the the quality quality of corporate of corporate governance governance as a as Top a Top Ten Ten issue. issue. 10 Quality Quality of risk of management risk management
Asia Asia Pacific Pacific

1 2 3 4 5 6 7 8 9 10
The The AsiaAsia Pacific Pacific response response covers covers a wide a wide variety variety of of economies, economies, including including Japan, Japan, China, China, Malaysia Malaysia and and Australia, Australia, and and therefore therefore Liquidity 3 Liquidity displays displays less less obvious obvious patterns. patterns. However However Regulation 4 Regulation concern concern about about the the economic economic outlook outlook is is Capital 5 Capital availability availability strong, strong, particularly particularly the risk the risk of contagion of contagion fromfrom the eurozone the eurozone crisis. crisis. There There are also are also worries worries Political 6 Political interference interference about about the prospects the prospects for the for region the region if China if China Profitability 7 Profitability slows slows down. down. The The growth growth of of banking banking Quality 8 Quality of risk of management risk management regulation regulation and and political political interference interference is ais a High 9 High dep.dep. on technology on technology concern concern in many in many countries, countries, as is asthe is the highhigh technological technological dependence dependence of banks. of banks. 10 Derivatives Derivatives
9 9
8 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org
Banking Banking Banana Banana Skins Skins 2012 2012

Industrial Industrial countries countries
1 2 3 4 5 6 7 8 9 10
Countries Countries at at different different levels levels of of development development share share the the same same risk risk outlook outlook
There There is little is little surprise surprise in the in the industrial industrial countries countries top worries: top worries: the state the state of the ofglobal the global economy economy and the andrisk the of risk a major of a major credit credit crisis. crisis. Liquidity 3 Liquidity Concern Concern about about funding funding issues issues and and Regulation 4 Regulation profitability profitability is also is also strong. strong. Bankers Bankers in all in the all the Capital 5 Capital availability availability countries countries in this in group this group are concerned are concerned about about the strong the strong growth growth of regulation, of regulation, believing believing Political 6 Political interference interference that that it isit adding is adding unnecessary unnecessary cost cost and and Profitability 7 Profitability distraction, distraction, and and holding holding backback growth. growth. Derivatives 8 Derivatives However However they they also also recognise recognise that the thatquality the quality Corporate 9 Corporate governance governance of their of their risk risk management management and and governance governance needs needs attention. attention. 10 Quality Quality of risk of management risk management
Emerging Emerging economies economies

1 2 3 4 5 6 7 8 9 10
Although Although the the emerging emerging economies economies are are broadly broadly in ain stronger a stronger position position than than the the industrial industrial countries, countries, their their concern concern about about the the Liquidity 3 Liquidity debt debt problems problems of the of developed the developed world world is is Capital 4 Capital availability availability intense. intense. The The risk risk of aof collapse a collapse in global in global Quality 5 Quality of risk of management risk management demand demand and of and a parallel of a parallel crisis crisis in the inbanking the banking markets markets is currently is currently their their greatest greatest worry; worry; Profitability 6 Profitability nonenone of them, of them, eveneven China, China, would would be be Corporate 7 Corporate governance governance insulated insulated fromfrom the shocks. the shocks. Banks Banks in this in this Political 8 Political interference interference group group are also are also concerned concerned about about the strength the strength Pricing 9 Pricing of risk of risk of their of their management, management, with with the growth the growth of of political political interference interference a new a new worry. worry. 10 Derivatives Derivatives
10 10
CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 9
Preparedness Preparedness
We We asked asked respondents respondents how how well well prepared prepared they they thought thought banks banks were were to handle to handle the the risks risks thatthat lie ahead, lie ahead, on a on scale a scale where where 5=well 5=well prepared prepared andand 1=poorly 1=poorly prepared. prepared. TheThe average average score score of more of more than than 700700 responses responses waswas 2.96, 2.96, which which is slightly is slightly better better than than middling. middling. However However the the result result waswas strongly strongly weighted weighted by bankers by bankers who who hadhad a higher a higher opinion opinion of of their their preparedness preparedness than than their their observers observers and and regulators regulators (though (though regulators regulators were were slightly slightly more more positive positive than than observers). observers).
Bankers Bankers Regulators Regulators Observers Observers Total Total 3.13 3.13 2.92 2.92 2.62 2.62 2.96 2.96
On On the the positive positive side, side, many many respondents respondents saidsaid thatthat banks banks hadhad put put a lot a of lot work of work intointo riskrisk management, management, andand were were better better prepared prepared for for what what were were likely likely to be to very be very difficult difficult conditions conditions over over the the next next fewfew years. years. For For example, example, the the executive executive vice-president vice-president of risk of risk services services at aat large a large Canadian Canadian bank bank saidsaid thatthat banks banks have have lived lived through through andand survived survived the the recent recent recession, recession, so are so are well well prepared prepared to handle to handle risks. risks. TheThe recent recent recession recession has has alsoalso increased increased the the profile profile of risk of risk management, management, in turn, in turn, increasing increasing oversight/risk oversight/risk mitigation. mitigation.
The The risks risks lielie in in the the unknown unknown unknowns unknowns
A bank A bank economist economist in the in the UKUK put put in ain special a special plea: plea: The The trouble trouble is that is that there there is ais a wide wide disparity disparity between between the the capabilities capabilities of different of different banks. banks. Increasingly Increasingly banks banks andand bankers bankers are are referred referred to as to homogenous as homogenous groupings; groupings; there there is very is very little little recognition recognition of of how how well well some some banks banks have have performed performed despite despite the the turbulence. turbulence. Many Many respondents respondents were were alsoalso sympathetic sympathetic to the to the factfact thatthat present present conditions conditions are are unprecedented, unprecedented, andand thatthat banks banks are are snowed snowed under under with with risks, risks, many many of them of them outside outside their their control: control: the the state state of the of the global global economy, economy, the the possible possible collapse collapse of the of the eurozone, eurozone, andand heavy heavy political political interference. interference. As As oneone consultant consultant said: said: The The risks risks lie lie in the in the unknown unknown unknowns. unknowns. ButBut many many respondents respondents felt felt thatthat the the banks banks hadhad been been slow slow to respond to respond to their to their difficulties, difficulties, be be it for it for reasons reasons of complacency, of complacency, incompetence, incompetence, or the or the view view thatthat prudence prudence stood stood in the in the way way of profits. of profits. They They therefore therefore remained remained vulnerable vulnerable to shocks. to shocks. One One respondent respondent saidsaid thatthat having having abandoned abandoned the the culture culture of prudence of prudence during during the the good good times, times, banks banks were were now now re-rigging re-rigging at sea at sea which which waswas not not an easy an easy exercise, exercise, and and surely surely not not necessarily necessarily an effective an effective one. one.
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1.1.Macro-economic Macro-economic risk risk (4) (4)

TheThe fragility fragility of the of the world world economy economy with with the the possibility possibility of aof return a return to recession to recession poses poses the the greatest greatest riskrisk to the to the banking banking industry industry in these in these turbulent turbulent times, times, according according to this to this pollpoll of bankers of bankers andand close close observers observers of the of the banking banking scene scene in 58 in countries. 58 countries. No No surprise surprise in this in this finding, finding, perhaps. perhaps. ButBut the the picture picture painted painted by by thisthis survey survey is is unquestionably unquestionably the the bleakest bleakest we we have have seen seen in more in more than than 15 years 15 years of Banking of Banking Banana Banana Skins Skins reports, reports, with with huge huge uncertainty uncertainty over over the the near-term near-term prospects, prospects, but but also also the the certainty certainty thatthat wrenching wrenching changes changes willwill be needed be needed to restore to restore stability stability andand growth growth in in the the longer longer term. term. The The outlook outlook is terrible is terrible waswas the the blunt blunt comment comment from from a UK a UK bank bank director, director, words words which which reflected reflected a level a level of concern of concern thatthat waswas shared shared in most in most parts parts of of the the world. world. TheThe main main causes causes are are obvious: obvious: crisis crisis in the in the eurozone eurozone andand mounting mounting debt debt problems problems in in many many of the of the worlds worlds largest largest economies, economies, linked linked to low to low banking banking confidence confidence andand a a scarcity scarcity of credit. of credit. A period A period of financial of financial disruption disruption could could severely severely damage damage the the global global economy, economy, andand smother smother the the prospect prospect of growth of growth for for many many years. years. Another Another banker banker said said thatthat European European recession recession seems seems certain, certain, US US recession recession likely likely andand a significant a significant slowing slowing of growth of growth in Asia in Asia andand Brazil Brazil is also is also likely. likely. Sir Sir Brian Brian Pearse, Pearse, former former chief chief executive executive of the of the Midland Midland Bank Bank andand chairman chairman of the of the CSFI, CSFI, said: said: The The biggest biggest riskrisk of all of is allthat is that it will it will not not prove prove possible possible to bring to bring about about an an orderly orderly reduction reduction of borrowing of borrowing by by nations, nations, banks banks andand commercial commercial andand individual individual customers customers resulting resulting in ain major a major recession. recession. TheThe head head of stress of stress testing testing at aat large a large Swiss Swiss bank, bank, said said his his twotwo main main concerns concerns were: were: Firstly Firstly thatthat the the eurozone eurozone shatters shatters and, and, conversely, conversely, thatthat duedue to massive to massive printing printing of money, of money, inflation inflation rises rises to well to well above above comfortable comfortable levels. levels. TheThe impact impact on banks on banks would would be severe. be severe. Despite Despite all the all the measures measures thatthat have have been been taken taken to bolster to bolster banking banking systems, systems, the the fearfear is that is that there there willwill be considerable be considerable retrenchment retrenchment in in the the sector, sector, andand possibly possibly failures failures thatthat financially financially stressed stressed governments governments willwill find find it it hard hard to prevent. to prevent. With With financial financial markets markets tightly tightly linked, linked, anyany local local crisis crisis would would spread spread quickly quickly through through the the global global banking banking system, system, affecting affecting even even countries countries which which have have so far so far been been in good in good economic economic health. health. City City of London of London economist economist Andrew Andrew Smithers Smithers said said thatthat excess excess debt debt means means thatthat defaults defaults are are likely likely to be to well be well above above historic historic levels levels in the in the years years ahead, ahead, andand thisthis willwill be exacerbated be exacerbated by slow by slow growth growth andand even even more more by recession. by recession. All All the the major major regions regions in this in this survey survey showed showed a high a high level level of concern of concern with with the the growing growing financial financial strains. strains. TheThe chairman chairman of the of the riskrisk committee committee of aof large a large Canadian Canadian bank bank said said thatthat progress progress on fundamental on fundamental imbalances imbalances has has been been not not enough enough andand too too slow, slow, andand Gary Gary Dingley, Dingley, chief chief operational operational riskrisk officer officer at the at the Commonwealth Commonwealth Bank Bank of of Australia, Australia, said said thatthat from from my my own own institutions institutions perspective, perspective, the the outlook outlook for for the the next next 2-3 2-3 years years willwill be challenging be challenging duedue to the to the external external environment. environment. TheThe head head of country of country riskrisk of aof bank a bank in Brazil in Brazil said said his his top top concern concern waswas the the ability ability of banks of banks to to cover cover losses losses if the if the European European sovereign sovereign crisis crisis spreads spreads or results or results in ain new a new financial financial crisis. crisis.
A new A new global global recession recession could could cause cause more more bank bank failures failures
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China: China: handle handle with with care care
Chinas Chinas prospects prospects were were central central to respondents to respondents assessments assessments of many of many of the of the key risks key risks in this in this survey: survey: the global the global economic economic outlook, outlook, the stability the stability of financial of financial markets, markets, the resolution the resolution of sovereign of sovereign debtdebt problems, problems, and and the safety the safety of the of the banking banking system. system. Providing, Providing, as it as does, it does, a counterbalance a counterbalance to the to Wests the Wests economic economic weakness weakness and and fiscal fiscal deficits, deficits, China China could could have have a devastating a devastating effect effect if if it started it started to go to wrong. go wrong. The The overall overall tonetone of comment of comment about about China China was was cautious, cautious, even even sceptical. sceptical. Many Many respondents respondents noted noted that that economic economic growth growth was was slowing, slowing, and and that that China China was was building building up internal up internal strains strains which which could could lead lead to political to political and and economic economic turbulence. turbulence. One One of them of them said: said: China China is slowing is slowing and and veryvery few banks few banks are really are really prepared prepared for this; for this; theirtheir business business plans plans all call all for callbig for expansion big expansion in Asia. in Asia. A particular A particular worry worry is Chinas is Chinas banking banking system system which which is seen is seen to be to be undercapitalised undercapitalised and and threatened threatened by inflated by inflated asset asset prices. prices. It also It also has a has a shadow shadow banking banking system system which which is poorly is poorly understood. understood. The The head head of treasury of treasury at at one one of Chinas of Chinas largest largest banks banks said said that that the finance the finance industry industry faced faced risksrisks fromfrom many many directions. directions. TheThe pacepace of profit of profit growth growth will slow will slow down, down, and and it is it worth is worth noting noting that that the banking the banking industry industry will increasingly will increasingly encounter encounter risksrisks in liquidity in liquidity which which result result fromfrom credit-related credit-related risks. risks. Nonetheless, Nonetheless, the overall the overall risksrisks are are relatively relatively manageable manageable in our in view. our view. Giles Giles Chance, Chance, professor professor at the at Guanghua the Guanghua School School of Management of Management at Peking at Peking University, University, said said the government the government needed needed to liberalise to liberalise the banking the banking system system to to increase increase transparency transparency and and confidence. confidence. ButBut it's not it's clear not clear that that China China will go will go down down this this route route any time any time soonsoon because because it will it undermine will undermine the CCP's the CCP's control control of of China China which which it exercises it exercises through through the large the large banks banks and and state-owned state-owned enterprises. enterprises.
In South In South Africa, Africa, the chief the chief risk risk officer officer of a of large a large South South African African bankbank commented: commented: MyMy principal principal concern concern centres centres on the on stability the stability of the of European the European banking banking system system and and the systemic the systemic risk risk that that could could ensue ensue if one if of one the ofbanks the banks exposed exposed to euro to euro sovereign sovereign debt debt actually actually fails. fails. Moreover, Moreover, this risk this risk is prevalent is prevalent at a at time a time when when sovereigns sovereigns themselves themselves will will find find it difficult it difficult to support to support the banking the banking sector sector and and when when banks' banks' access access to new to new capital capital and term and term liquidity liquidity is restricted is restricted and/or and/or prohibitively prohibitively expensive. expensive.
2. 2. Credit Credit risk risk (2) (2)

Can Can the the global global banking banking system system absorb absorb all all the the likely likely losses? losses?
The The concerns concerns of respondents of respondents about about credit credit risk risk focused focused less less on the on likelihood the likelihood of loss, of loss, which which mostmost of them of them tooktook as read, as read, thanthan on the onscale the scale of likely of likely losses, losses, and their and their impact. impact. HowHow big will big will theythey be, and be, and will will the system the system be able be able to absorb to absorb them? them? The The headhead of of prudential prudential policy policy at a at large a large UK UK bank bank said:said: [Loss [Loss is] ais] certainty. a certainty. More More relevant relevant is is whether whether this can this be can covered be covered by existing by existing capital. capital. The The fear fear among among many many respondents respondents was was that that the answer the answer is no, is no, the obvious the obvious consequence consequence being being the likelihood the likelihood of bank of bank failures failures and/or and/or nationalisations. nationalisations. The The risk risk of financial of financial institutions institutions defaulting defaulting has has increased increased drastically, drastically, said said the head the head of credit of credit control control at a large at a large Scandinavian Scandinavian bank. bank. As might As might be expected, be expected, by far by the far biggest the biggest concern concern is sovereign is sovereign debtdebt , both , both in the in the industrialised industrialised world world and and emerging emerging countries. countries. One One respondent respondent foresaw foresaw a sovereign a sovereign default default domino. domino. Most Most developed developed nations nations are are insolvent, insolvent, and and it's only it's only collective collective disbelief disbelief in the inmarkets the markets that that keeps keeps them them fromfrom dumping dumping sovereign sovereign debt debt en masse en masse . . Top Top of the oflist theis list the iseurozone the eurozone , both , both for the forscale the scale of the ofrisk the risk and the andhesitancy the hesitancy of the of the political political response. response. Although Although the banks the banks mostmost immediately immediately under under threat threat are European, are European,
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the the effects effects could could be global. be global. A European A European financial financial regulator regulator sawsaw a spillover a spillover of the of the eurozone eurozone sovereign sovereign crisis crisis intointo a full a full blown blown banking banking crisis crisis driving driving an unsustainable an unsustainable riserise in funding in funding costs costs andand the the possible possible freezing freezing of the of the banking banking system. system. TheThe director director of regulatory of regulatory affairs affairs at aatlarge a large UKUK bank bank sawsaw the the potential potential for for a vicious a vicious circle circle of of contagion contagion from from impaired impaired sovereigns sovereigns to the to the financial financial sector sector back back to sovereigns to sovereigns thatthat might might not not otherwise otherwise be credit-impaired be credit-impaired and and the the impact impact of this of this on macroeconomic on macroeconomic performance. performance. Other Other potential potential sources sources of credit of credit riskrisk include include housing housing finance finance . A .senior A senior regulators regulators top top concerns concerns included included debt debt deflation, deflation, leading leading to falling to falling property property values values in Europe, in Europe, the the US US andand China China against against which which banks banks have have large large residential residential andand commercial commercial mortgage mortgage exposures. exposures. Consumer Consumer debt debt is ais growing a growing concern, concern, andand not not justjust in the in the advanced advanced economies. economies. A A banker banker in Turkey in Turkey said said thatthat credit credit card card andand consumer consumer loan loan exposure, exposure, which which is is growing growing worldwide, worldwide, especially especially in the in the developing developing andand emerging emerging markets, markets, should should be be given given greater greater attention. attention. China China is also is also a worry. a worry. A bank A bank auditor auditor there there waswas concerned concerned about about the the deteriorating deteriorating credit credit environment environment amidst amidst the the slowdown/recession slowdown/recession of the of the world world economy economy (e.g. (e.g. US US slowdown, slowdown, Eurozone Eurozone debt debt andand the the property property bubble bubble in Asia) in Asia) which which willwill create create threats threats to the to the credit credit quality quality of financial of financial institutions. institutions. TheThe level level of anxiety of anxiety waswas somewhat somewhat lower lower in North in North America, America, partly partly reflecting reflecting the the generally generally healthier healthier state state of the of the Canadian Canadian economy, economy, but but also also a sense a sense in the in the American American banking banking community community thatthat they they may may be be past past the the worst. worst. However However regulators regulators there there expressed expressed concern concern about about the the high high levels levels of consumer of consumer andand housing housing debt, debt, with with a US a US official official predicting predicting thatthat mortgage mortgage write-downs, write-downs, write-offs, write-offs, andand short short sales sales willwill continue continue to plague to plague the the banking banking sector sector for for the the next next 2-3 2-3 years, years, andand remain remain a drag a drag on on the the economy. economy.
3.3.Liquidity Liquidity (5) (5)

Concerns Concerns about about liquidity liquidity are are on the on the riserise again. again. They They topped topped the the Banana Banana Skins Skins pollpoll in in th th place in 2010 in 2010 as the as the financial financial crisis crisis appeared appeared to recede. to recede. ButBut 2008 2008 andand eased eased off off to 5to 5 place now now people people are are worried worried about about a re-run a re-run of 2008, of 2008, with with the the banks banks funding funding markets markets seizing seizing up once up once more more andand causing causing havoc. havoc. As As respondents respondents pointed pointed out,out, a liquidity a liquidity crisis crisis is not is not a threat a threat but but a fact a fact for for many many banks, banks, notably notably in the in the eurozone, eurozone, which which cancan no longer no longer fund fund themselves themselves in the in the markets, markets, andand have have been been forced forced to turn to turn to their to their central central banks. banks. TheThe question, question, really, really, is how is how much much worse worse thisthis is likely is likely to get, to get, andand what what impact impact it will it will have. have. John John Hitchins, Hitchins, banking banking partner partner at PwC, at PwC, said said thatthat in in the the short short term term the the biggest biggest threat threat to the to the banking banking system system is the is the impact impact on on wholesale wholesale funding funding markets markets of a offailure a failure to to solve solve the the Eurozone Eurozone crisis, crisis, andand a disorderly a disorderly default default by one by one or more or more countries. countries. This This could could cause cause a funding a funding freeze freeze worse worse than than 2008. 2008. Some Some respondents respondents said said thatthat the the riskrisk waswas being being made made worse worse by the by the tougher tougher liquidity liquidity standards standards now now being being imposed imposed by regulators. by regulators. These These are are creating creating a shortage a shortage of suitable of suitable assets, assets, andand even even encouraging encouraging greater greater risk-taking risk-taking by by banks. banks. TheThe chief chief financial financial officer officer of a of large a large South South East East Asian Asian bank bank said said thatthat liquidity liquidity riskrisk management management is ais a keykey concern. concern. As As financial financial institutions institutions are are pressured pressured to reduce to reduce their their risk-weighted risk-weighted assets, assets, they they willwill be forced be forced to take to take more more interest interest raterate riskrisk andand funding funding riskrisk to increase to increase returns returns on their on their capital. capital. James James Prichard, Prichard, a swaps a swaps specialist specialist at Crdit at Crdit Agricole Agricole CIB, CIB,
Concerns Concerns about about liquidity liquidity are are on on the the rise rise again again
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saidsaid thatthat banks banks could could findfind themselves themselves in ain liquidity a liquidity traptrap competing competing for for deposits deposits to to staystay in existence, in existence, but but then then struggling struggling to find to find opportunities opportunities to lend to lend or invest. or invest. Although Although liquidity liquidity riskrisk has has its roots its roots in the in the euro euro crisis crisis and and the the fearfear of collapsing of collapsing banks, banks, its repercussions its repercussions could could be far-reaching. be far-reaching. Respondents Respondents from from all major all major banking banking regions regions mentioned mentioned the the danger danger of contagion. of contagion. TheThe head head of market of market funding funding at aat New a New Zealand Zealand bank bank saidsaid there there waswas massive massive concern concern about about the the truetrue position position of many of many banks, banks, especially especially those those with with exposure exposure to European to European sovereign sovereign debt. debt. Another Another liquidity liquidity squeeze squeeze seems seems inevitable inevitable unless unless thisthis problem problem is addressed is addressed with with proper proper mark-tomark-tomarket market valuation valuation followed followed by recapitalisation by recapitalisation of those of those thatthat require require it. it. ButBut though though fears fears of aof liquidity a liquidity crunch crunch are are widespread, widespread, many many individual individual banks banks saidsaid they they were were currently currently in ain good a good liquidity liquidity position, position, andand a US a US regulator regulator commented commented thatthat the the riskrisk waswas low low in the in the US US with with liquidity liquidity nearing nearing 20 year 20 year highs, highs, but but high high in Europe in Europe andand potentially potentially elsewhere. elsewhere. Professor Professor Charles Charles Goodhart Goodhart of the of the London London School School of of Economics Economics agreed agreed thatthat the the risks risks are are quite quite high, high, but but central central banks banks are are on the on the case. case.
4.4. Capital Capital availability availability (6) (6)

With With banks banks under under pressure pressure from from regulators regulators to strengthen to strengthen their their balance balance sheets, sheets, the the availability availability of capital of capital at the at the right right price price is becoming is becoming a key a key issue, issue, even even a matter a matter of of survival survival for some for some banks, banks, though though thisthis is a is risk a risk with with strong strong geographical geographical variations. variations. It It waswas clear clear from from the the responses responses thatthat the the greatest greatest problems problems lie in lie Europe in Europe where where many many banks banks have have already already been been effectively effectively shut shut out out of the of the funding funding markets. markets. Capital-raising Capital-raising willwill be difficult: be difficult: competition competition for for funding funding is strong, is strong, andand the the banking banking sector sector is not is not in favour. in favour. A UK A UK institutional institutional fund fund manager manager asked: asked: If banks If banks can't can't make make good good profits, profits, why why would would investors investors want want to assign to assign capital capital to the to the sector? sector? Even Even where where it it is available, is available, there there is ais question a question of price. of price. A banking A banking consultant consultant said: said: Capital Capital willwill always always be be available available for for important important essential essential organisations organisations such such as banks. as banks. TheThe question question rests rests on affordability. on affordability. I think I think banks banks andand investors investors willwill need need to revise to revise expectations expectations on returns. on returns. This This is an is essential an essential partpart of the of the changes changes required required to make to make the the industry industry safer safer andand more more appropriate appropriate to retail to retail deposit deposit taking. taking. Banks Banks thatthat cannot cannot raise raise capital capital willwill have have to to reduce reduce assets assets (deleverage), (deleverage), consolidate, consolidate, or turn or turn to public to public funding. funding. ButBut all of all these of these routes routes have have their their risks, risks, both both for for the the banks banks themselves themselves andand the the wider wider economy. economy. James James Ferguson, Ferguson, head head of strategy of strategy at Arbuthnot at Arbuthnot Banking Banking Group, Group, warned warned that, that, in trying in trying to shrink to shrink their their balance balance sheets, sheets, banks banks willwill only only be able be able to shed to shed good good quality quality assets assets because because they they dont dont have have the the latitude latitude with with their their capital capital to shift to shift the the poor poor quality, quality, illiquid illiquid ones. ones. TheThe quality quality of of banks banks remaining remaining assets assets deteriorates deteriorates andand the the workout workout getsgets extended extended some some years years intointo the the future. future. Another Another unintended unintended consequence consequence could could be that be that banks banks feelfeel compelled compelled to to take take on more on more riskrisk to compensate to compensate for lost for lost revenue. revenue. Asset Asset reduction, reduction, as many as many respondents respondents pointed pointed out,out, is politically is politically unpopular unpopular at aat time a time of economic of economic recession, recession, which which adds adds to the to the conflicting conflicting pressures pressures on on the the banking banking industry. industry. TheThe CEO CEO of aof UK a UK bank bank said: said: There There is a is real a real mixing mixing of messages of messages between between government government pressure pressure to lend to lend andand regulators' regulators' pressure pressure to build to build up capital up capital buffers. buffers. Consolidation, Consolidation, particularly particularly under under duress, duress, can can be disruptive, be disruptive, andand the the availability availability of of public public funding funding has has shrunk shrunk drastically. drastically. ButBut other other respondents respondents were were more more sanguine. sanguine. TheThe more more hard-nosed hard-nosed saidsaid thatthat a tougher a tougher capital capital market market would would impose impose a healthy a healthy discipline discipline on banks, on banks, andand force force them them to think to think more more carefully carefully about about how how they they manage manage their their resources. resources. Some Some felt felt the the situation situation waswas
The The availability availability of of capital capital at at the the right right price price is is becoming becoming anan issue issue
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C S F I / New York CSFIBanking Banking Banana Banana Skins Skins 2012 2012
better better than than it it looked. looked. Andrew Andrew Cornford, Cornford, counsellor counsellor at at the the Observatoire Observatoire dede la la Finance Finance inin Switzerland, Switzerland, said said that that the the problem problem is is probably probably overrated, overrated, particularly particularly inin view view ofof the the transition transition periods periods to to apply apply the the new new financial financial regulatory regulatory architecture. architecture. The The picture picture also also varies varies from from one one region region toto another. another. There There was was less less concern concern inin North North America America and and inin emerging emerging markets markets which which have have a lower a lower dependence dependence onon international international funding fundingsources. sources.Respondents Respondentsfrom fromcountries countrieslike likeAustralia Australiaand andCanada Canadaalso also reported reported that that funding funding conditions conditions were were good, good, and and in in the the US US a banking a banking regulator regulator said said the the situation situation there there was was improving: improving: US US institutions institutions have have already already recapitalized recapitalized and and are are currently currently near near 20-year 20-year highs highs inin liquidity. liquidity.
US US banks banks are are seen seen to to be be better better capitalised capitalised than than the the Europeans Europeans
5. 5. Political Politicalinterference interference(1) (1)

Concern Concern about about the the growth growth ofof political political interference interference inin the the banking banking industry industry has has come come down down from from the the top top position position it it occupied occupied inin the the last last survey survey but but only only because because it it is is nono longer longer a threat a threat but but a reality. a reality. Intrusion Intrusion by by politicians politicians and and governments governments in in banking banking is is now now a fact a fact ofof life, life, bebe it it inin the the form form ofof nationalisation, nationalisation, tougher tougher regulation, regulation, new new taxes, taxes, pressure pressure on on business business decisions decisions oror simple simple bank bank bashing. bashing. For For most most ofof our our respondents respondents (but (but not not all) all) this this was was aa worrying worrying development development which which endangered endangered the the health health ofof the the banks banks by by distorting distorting business business judgment judgment and, and, perversely, perversely, forcing forcing them them toto take take risks risks they they might might otherwise otherwise have have avoided. avoided. Increasingly, Increasingly, it it is is putting putting banks banks in in aa bind. bind. Sir Sir Adam Adam Ridley, Ridley, chairman chairman ofof Equitas Equitas Trust, Trust, said said that that further further political political interference interference is is aa certainty, certainty, much much ofof it it extremely extremely ignorant, ignorant, aggravated aggravated by by the the lack lack ofof public public sympathy sympathy oror understanding understanding for for the the position position ofof the the banks, banks, and and the the inability inability ofof bank bank leadership leadership toto explain explain oror defend defend rational rational behaviour behaviour onon their their part. part. The The biggest biggest risk risk for for the the outside outside world world is is that that the the banks banksare areoverwhelmed overwhelmedwith withrestrictive restrictivepressures pressureswhich whichprevent preventthem themfrom from sustaining, sustaining, letlet alone alone increasing, increasing, their their lending lending toto the the real real economy. economy. While While aa lot lot ofof the the concern concern came came from from London-based London-based respondents, respondents, this this was was by by nono means means a British a British obsession. obsession. It It was was echoed echoed inin responses responses from from Switzerland, Switzerland, Germany, Germany, the the Netherlands, Netherlands, Central Central Europe, Europe, the the US, US, China, China, South South Africa Africa and and History History tells tells usus that that when when things things get get Australasia. Australasia. AA credit credit risk risk manager manager at at desperate, desperate, politicians politicians resort resort toto higher higher one ofof the the large large Swiss Swiss banks banks said said taxation, taxation, suspension suspension of of convertibility convertibility oror one transferability, transferability, confiscation, confiscation, and and that that politicians politicians have have the the ability ability toto changing changing coupons coupons on on outstanding outstanding debt debt severely severelydamage damagethe thewhole wholesector sector (all (all of of which which have have happened happened in in living living (more (more than than they they already already have) have) e.g. e.g. memory). memory). Tobin Tobin tax, tax, Basel Basel 33 etc. etc. The The chief chief David David Potter, Potter, investment investment banker banker financial financial officer officer ofof one one ofof the the large large regional regional US US banks banks said: said: You You only only have have toto look look at at what what has has happened happened inin the the past past 10 10 years years toto see see the the damage, damage, and and we we have have aa major major election election headed headed our our way way inin 2012 2012 with with both both political political parties parties and and the the media media wanting wanting toto beat beat the the industry. industry. But But aa number number ofof respondents respondents did did not not see see political political interference interference inin such such aa negative negative light: light:they they said saidit itwas wasa anecessary necessary step steptotoreform reformbanks banksand andrestore restorepublic public confidence. confidence. AA banking banking consultant consultant said: said: II think think the the current current progress progress and and direction direction ofof focus focus financial financial stability, stability, prudential prudential regulation, regulation, greater greater challenge challenge and and critical critical thinking thinking is is allall appropriate appropriate and and will will lead lead toto a safer a safer system. system. The The problem problem is is getting getting there. there.
Banks Banks are are simultaneously simultaneously being being told told to to be be more more prudent prudent and and to to lend lend more more
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6. 6. Regulation Regulation (3) (3)
Even Even though though regulation regulation is is supposed supposed to to make make banks banks safer, safer, it continues it continues to to bebe seen seen byby the the majority majority of of our our respondents respondents (particularly (particularly bankers) bankers) as as excessive, excessive, and and therefore therefore a a potential potential risk risk to to the the banking banking system system and and to to the the wider wider economy. economy. The The risks risks include include higher higher costs, costs, management management distraction, distraction, constraints constraints onon profitability, profitability, and and reduced reduced capacity capacity to to lend. lend. And And these these assume assume that that regulation regulation is is well-intentioned; well-intentioned; many many respondents respondents felt felt that that recent recent regulatory regulatory initiatives initiatives were were a form a form of of political political retribution, retribution, intended intended to to teach teach the the banks banks a lesson. a lesson. The The director director of of regulatory regulatory affairs affairs at at a large a large British British clearing clearing bank bank said said that that the the extreme extreme risk risk aversion aversion of of the the authorities authorities was was leading leading to to anan inability inability of of banks banks to to make make sufficient sufficient returns, returns, either either byby raising raising the the cost cost of of equity equity or or byby constraining constraining their their ability ability to to raise raise prices. prices. The The resulting resulting inability inability to to monetise monetise the the franchise franchise while while being being required required to to generate generate equity equity internally internally could could result result in in damaging damaging de-leveraging de-leveraging that that nobody nobody intends. intends.
The The culture culture of of blame blame

There There seems seems to to bebe a relentless a relentless blame blame culture culture which which shows shows nono sign sign of of abating. abating. While While this this may may not not drive drive the the profound profound change change in in leadership leadership some some might might like, like, it it will will inevitably inevitably bebe a barrier a barrier to to entry entry forfor the the new new entrants entrants that that are are needed needed to to create create the the lifeblood. lifeblood. There There is widespread is widespread confusion confusion onon what what the the role role of of banks banks should should be, be, with with terms terms such such as as socially socially useless useless persisting. persisting. There There is a is balance a balance to to bebe had had between between social social and and economic economic concerns: concerns: both both are are legitimate legitimate and and need need to to bebe addressed. addressed. But But not not allall that that is wrong is wrong with with society society can can bebe left left at at the the door door of of the the banks. banks. Director, Director, group group risk, risk, UK UK clearer clearer
The The weight weight of of regulation regulation isis seen seen to to be be choking choking lending lending capacity capacity
AA director director of of government government affairs affairs at at a large a large US US bank bank said said his his concern concern was was that that as as a a result result of of regulatory regulatory overload, overload, the the banking banking industry industry will will become become un-investable. un-investable. Many Many banks banks will will then then fail fail to to attract attract private private sector sector capital capital to to meet meet Basel Basel 3 or 3 or EU EU stress stress test test requirements, requirements,and andwill willneed needto tobebenationalised nationalisedor orrecapitalised recapitalisedbyby public public intervention. intervention. Bankers Bankers might might bebe expected expected to to say say this, this, but but similar similar views views emerged emerged from from non-bankers. non-bankers. AA respondent respondent from from one one of of the the large large credit credit rating rating agencies agencies said: said: Basel Basel 3 3 implementation implementation will will make make earnings earnings stability stability a a major major challenge challenge for for allall affected affected banks. banks. He He feared feared that that new new funding funding requirements requirements will will make make loans loans both both more more scarce scarce and and much much more more expensive expensive with with the the implications implications that that has has for for the the macro-economy. macro-economy. Even Even regulators regulators had had some some sympathy sympathy with with these these views. views. AA US US regulator regulator said said that that financial financial regulatory regulatory reform reform has has overshot overshot the the mark mark and and will will bebe a drain a drain onon economic economic growth growth and and the the soundness soundness of of the the banking banking sector, sector, and and a British a British regulator regulator agreed agreed that that there there was was a risk a risk of of management management distraction. distraction. Marcus Marcus Killick, Killick, chief chief executive executive of of Gibraltars Gibraltars Financial Financial Services Services Commission, Commission, said said that that more more regulation regulation will will not not mean mean better better regulation. regulation. But But at at the the end end of of the the day, day, the the sector sector rankings rankings speak speak for for themselves: themselves: for for bankers, bankers, this this was was the the No. No. 5 risk, 5 risk, for for non-bankers non-bankers No. No. 1212 and and for for regulators regulators No. No. 24. 24. One One thread thread of of concern concern was was the the lack lack of of international international coordination coordination onon new new banking banking regulation. regulation. The The risk risk of of divergence divergence was was seen seen to to bebe particularly particularly strong strong between between the the EU EU and and the the US. US. AA US-based US-based banker banker said said that that differences differences will will force force a change a change in in the the
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C S F I / New York CSFI Banking BankingBanana BananaSkins Skins2012 2012

business businessmodel modelof ofglobal globalbanking, banking,reduce reducemarket marketliquidity liquidity and andresult resultin invery very heavy heavy implementation implementation and and maintenance maintenance costs. costs. Although Althoughmost most of of the the comments comments about about regulation regulation came came from from the the international international financial financialcentres centresof ofLondon Londonand andNew NewYork, York,there therewas wasplenty plentyof ofinput inputfrom fromother other territories. territories.A Asenior seniorbanker bankerin inCanada Canadasaid saidthat thatregulatory regulatoryrisk riskisisa ahuge hugeissue, issue,a a view view echoed echoed by by respondents respondents in in Switzerland, Switzerland, Continental Continental Europe, Europe, The The risk risk of of increasing increasing capital capital to to aa level level South SouthEast EastAsia, Asia,and andLatin LatinAmerica. America. which which stops stops banks banks paying paying an an adequate adequate The The chief chief risk risk officer officer of of aa Czech Czech bank bank return return to to equity equity investors investors isis huge huge and and said saidthat thatregulators regulatorswere wereforgetting forgetting avoidable. avoidable. When When the the history history of of the the that thatbanking bankingisisalso alsoa abusiness, business,and and 2020 2020 banking banking crisis crisis isis written, written, Basel Basel 33 aa banker banker in in China China said said that that regulatory regulatory capital capital requirements requirements will will be be seen seen as as cost costmay mayovertake overtakethe thebenefits benefitsthat that the the main main cause. cause. Corporate Corporate banker banker regulators regulators expect expect to to bring bring to to the the public. public. However, However,a asizeable sizeableminority minorityof ofrespondents respondentsapplauded applaudedregulatory regulatoryinitiatives initiativesas as well-intentioned well-intentionedand andnecessary. necessary.Philip PhilipWarland, Warland,head headof ofpublic publicpolicy policyat atFidelity Fidelity Worldwide WorldwideInvestment, Investment,said saidthat thatmost mostof ofthe thecurrent currentwave wave[of [ofregulation] regulation]isisgood good for forbanks, banks,but butmaybe maybenot notfor for their their current currentbusiness businessmodels. models.Some Somerespondents respondentsfelt felt that thatthe thereforms reformsdid didnot notgo gofar farenough. enough. Diane DianeCoyle, Coyle,director directorof ofEnlightenment Enlightenment Economics, Economics,said: said:None Noneof ofthe thereforms reformssince sincelate late2008 2008have havetackled tackledthe themain main vulnerability vulnerability of ofthe thefinancial financialsystem, system,namely namely the thevast vastmultiplicity multiplicityof oflinks linksbetween between very very large largeand andcomplicated complicatedinstitutions. institutions.The The big bigglobal globalbanks banksneed needto tobe bebroken brokenup up into intosmaller smallerand andsimpler simplerentities, entities,or orthe thecrisis crisiscould couldcontinue continueto tospiral spiralinto intoits itsnext next phase, phase, just just as as itit has has now now on on its its euro euro leg. leg.
7. 7. Profitability Profitability(-) (-)

In Inthese thesestressful stressfultimes, times,profitability profitability has hasbecome becomea along-term long-termissue issuefor forbanks banksrather rather than than just justa a matter matter of of the thenext next quarterly quarterly earnings earnings report. report.So So we we added added itit to to the the list listin in this thissurvey surveyto tolearn learnwhat whatpeople peoplehad hadto tosay sayabout aboutthe therisks risksto tobanks banksability abilityto to maintain maintain adequate adequate profitability profitability in in the the current current environment. environment. ItItemerged emergedas asa ahigh highrisk, risk,with withthe thegreat greatmajority majority of ofour ourrespondents respondentsbelieving believingthat that the the sector sector was was undergoing undergoing aa fundamental fundamental shift shift in in profit profitexpectations. expectations.Higher Higher capital capital requirements, requirements,greater greaterregulatory regulatoryand andcompliance compliancecosts, costs,curbs curbson onbanking bankingactivities, activities, higher higherstable stablefunding fundingcosts, costs,political politicalpressure pressureto tohold holddown downprices pricesall allof ofthese these are are impacting impacting bank bank profits, profits, and and are are likely likely to to be be around around for for aa while. while. A A UK UK bank bank chief chief executive executive said said that that every every aspect aspect of of the the P&L P&L isis under under pressure. pressure. Andrew AndrewGray, Gray,banking bankingpartner partnerat atPwC, PwC,said saidthat thatmanaging managingin ina alow lowgrowth, growth,low low interest interestrate rateenvironment environmentwill willchallenge challengemany manybanks. banks.Profitability Profitabilitywill willbe behard hardto to achieve, achieve,particularly particularlyas ascapital capitallevels levelsrequired requiredby byinternational internationalregulators regulatorsrise. rise.The The ability abilityto toattract attractfunds fundsand andgenerate generatesufficient sufficientreturns returnswill willtest testeven eventhe thestrongest strongest banks. banks. Many Many respondents respondents focused focused their their comments comments on on the the banks banks rates rates of of return. return. Traditionally Traditionally aa high high return return on on equity equity (ROE) (ROE) business, business, banking banking isis now now heading heading down, down, but buthow howfar? far?Bob BobMasi, Masi,a arisk riskmanager managerat atCitigroup, Citigroup,said saidthat thatincreased increasedcapital capital requirements, requirements,not notto tomention mentionbits bitsof oflegislation legislationlike likeDodd-Frank, Dodd-Frank,have havetransformed transformed what whatwas wasonce oncean an18% 18%ROE ROEindustry industryinto intoa a12% 12%ROE ROEat atbest. best.Current Currentreturn return expectations, expectations,respondents respondentssaid, said,were werefanciful fancifuland andneeded needed to tobe bemanaged manageddown. down.
Banks Banksearnings earnings expectations expectationshave have to tobe bemanaged managed down down
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This This would, would, however, however, be difficult be difficult at a time at a time when when the banks the banks are also are also under under pressure pressure to increase to increase theirtheir capital, capital, and there and there is always is always a danger a danger that that they they will will take take on more on more risk to risk keep to keep up their up their earnings. earnings. Looking Looking further further ahead, ahead, banks banks may may havehave to adapt to adapt to an toenvironment an environment of low of low growth growth and and low low returns, returns, where where regulation regulation demands demands greater greater simplicity, simplicity, and and where where public public opinion opinion is ready is ready pounce pounce on any on sign any sign of excess. of excess. The The headhead of strategy of strategy development development at at a large a large UK bank UK bank said said that massive that massive restructuring, restructuring, re-pricing re-pricing and cost-cutting and cost-cutting will will be be required required to reach to reach a model a model delivering delivering adequate adequate returns. returns. In the Inshort the short term, term, though, though, some some respondents respondents thought thought banks banks should should do quite do quite well well out out of the ofpresent the present environment, environment, with with its cheap its cheap money, money, statestate subsidies subsidies and constraints and constraints on on competition. competition. A couple A couple of respondents of respondents eveneven described described banks banks as rent as rent gougers. gougers.
8. 8. Derivatives Derivatives (7) (7)

Derivatives Derivatives and complex and complex instruments instruments are still are still seen seen as potential as potential sources sources of risk, of risk, but but the strength the strength of concern of concern seems seems to be tomoderating, be moderating, and is and certainly is certainly not at not the at level the level it it was a was few a years few years ago when ago when it topped it topped the Banana the Banana Skins Skins poll. poll. The The bad things bad things that that respondents respondents say about say about themthem centre centre mostly mostly on their on their opacity: opacity: the the fact fact that that few few people people really really understand understand themthem and and that that true true exposures exposures are hard are hard to to measure. measure. A respondent A respondent fromfrom one of one the of large the large financial financial tradetrade associations associations spoke spoke of of sprawling sprawling OTCOTC derivative derivative positions positions creating creating unmappable unmappable potential potential liability liability patterns, patterns, and and a managing a managing director director at a at major a major US US investment investment bankbank said said that that derivative derivative exposures exposures dwarf dwarf pure pure balance balance sheet sheet risk. risk. Currently, Currently, credit credit default default swaps swaps are important are important linkslinks in the in chain the chain of bank of bank exposure exposure to major to major risksrisks suchsuch as as sovereign sovereign debt,debt, and and newer newer derivatives derivatives suchsuch as Exchange as Exchange Traded Traded Funds Funds and and NewCITS NewCITS could could be a be source a source of future of future trouble. trouble. But But many many respondents respondents who who offered offered comments comments on this on this risk risk stressed stressed that that derivative derivative volumes volumes werewere easing easing off, and off, that and deals that deals werewere becoming becoming less complex. less complex. This This is partly is partly because because banks banks havehave introduced introduced better better controls controls since since the financial the financial crisis, crisis, and partly and partly the consequence the consequence of tougher of tougher regulation regulation which which makes makes derivative derivative dealing dealing less attractive less attractive than than it was it was previously. previously. A US A regulator US regulator said said that the that risks the risks werewere significantly significantly lower lower in the in the US US today today due due to the to the Dodd-Frank Dodd-Frank impact impact on swaps on swaps margins margins and and securitizations. securitizations.
Derivatives Derivatives risk risk may may be be easing easing offoff
9. 9. Corporate Corporate governance governance (12) (12)

Although Although corporate corporate governance governance has received has received a huge a huge amount amount of attention of attention since since the the onset onset of the of crisis, the crisis, therethere is still is still a feeling a feeling that that banks banks are not are getting not getting it right: it right: the the effectiveness effectiveness of boards, of boards, theirtheir control control over over management, management, the the qualifications qualifications of of directors, directors, and the andimpact the impact of regulation of regulation concerns concerns abound abound in allin these all these areas. areas. One One of the ofbiggest the biggest problems problems remains remains the complexity the complexity of large of large banking banking organisations, organisations, requiring requiring boards boards with with levels levels of knowledge, of knowledge, control control and foresight and foresight at the at extremes the extremes of of human human capacity. capacity. JohnJohn Plender, Plender, banking banking commentator commentator at the at Financial the Financial Times Times , said , said that there that there has not hasbeen not been as much as much clearing clearing out of out boards of boards as would as would havehave beenbeen justified justified by the bycrisis. the crisis. But there But there is also is also a shortage a shortage of people of people adequately adequately qualified qualified to play to play the the directors' directors' role in role unwieldy in unwieldy organisations organisations of huge of huge complexity. complexity.
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Despite Despite a lot a lot ofof work, work, corporate corporate governance governance remains remains an an issue issue
There There is also is also thethe problem problem of bank of bank boards boards being being pressured pressured or second or second guessed guessed by by thethe regulators. regulators. Some Some respondents respondents feltfelt that that regulators regulators were were becoming becoming shadow shadow directors directors and and undermining undermining directors directors accountability. accountability. One One bank bank CEO CEO thought thought that that regulatory regulatory pressure pressure will will lead lead companies companies to be to be so so risk risk averse averse that that they they will will notnot go go for for sound sound business business opportunities. opportunities. A number A number of respondents of respondents made made thethe point point that that thethe skills skills required required in times in times of stress of stress were were different different from from those those in good in good times. times. The The risk risk manager manager at a atUK a UK bank bank said said that that anyone anyone cancan make make money money in good in good times. times. Not Not losing losing money money in bad in bad times times takes takes skill skill . Other . Other that that I think I think very very few few have have respondents respondents said said that that thethe industry industry needed needed more more board board members members with with knowledge knowledge of of IT, IT, risk, risk, geo-politics geo-politics even even finance finance Corporate Corporate governance governance sounds sounds great, great, to to help help them them get get on on toptop of of thethe butbut all of all the of the measures measures proposed proposed since since thethe BIS BIS document document of 2006 of 2006 have have totally totally business business complexities. complexities. Some Some feltfelt failed failed to prevent to prevent disasters. disasters. One One hashas to to that that thethe more more gung-ho gung-ho investment investment conclude conclude that that such such governance governance in in banking banking culture culture was, was, in the in the words words of of banking banking is the is the triumph triumph of hope of hope over over one, one, still still the the dominant dominant force force in the in the experience! experience! management management of the of the sector. sector. Steve Steve Davis, Davis, Banking Banking consultant consultant Our Ourrespondents respondentsincluded includedbank bank directors directors who who described described thethe daunting daunting nature nature of the of the task task before before them, them, among among them them Richard Richard Farrant Farrant of Daiwa of Daiwa Capital Capital Markets, Markets, Europe, Europe, who who said: said: Experience Experience makes makes one one very very unconfident unconfident about about one's one's ability ability to oversee to oversee and and control control what what is really is really going going on. on. Another Another said: said: InIn thethe light light of events of events in 2007/8 in 2007/8 [corporate [corporate governance] governance] must must always always be a be significant a significant risk. risk. ButBut even even though though this this emerged emerged as a as high a high ranking ranking risk, risk, some some respondents respondents thought thought that that it was it was overrated. overrated. It was It was easy easy to criticise to criticise corporate corporate governance governance with with hindsight, hindsight, they they said, said, and and things things were were getting getting better. better. A US A US bank bank regulator regulator said said that that significant significant weaknesses weaknesses exposed exposed during during thethe crisis crisis areare gradually gradually being being addressed. addressed.
10. 10.Quality Quality ofof risk risk management management (8) (8)
so so does does risk risk management management
Much Much is being is being done done by by thethe banks banks to improve to improve their their risk risk management management after after thethe stresses stresses of the of the lastlast few few years. years. ButBut there there areare still still doubts doubts about about their their capabilities capabilities in this in this area. area. Why? Why? Much Much of it ofhas it has to do to do with with thethe position position of the of the risk risk management management function function inside inside banks: banks: it is it seen is seen to be to be second second order, order, lacking lacking independence, independence, underfunded, underfunded, tootoo reliant reliant on on mechanistic mechanistic devices devices like like checklists checklists and and models. models. And And so so long long as as banks banks Risk management systems areare Risk management systems have have generous generous bonus bonus schemes, schemes, there there becoming more robust, butbut stillstill lack becoming more robust, lack thethe ability to understand what trouble ability to understand what trouble will will always always be be an an encouragement encouragement to to thethe human brain can create. human brain can create. excessive excessive risk-taking. risk-taking.
Nick Hungerford, CEO, Nutmeg Nick Hungerford, CEO, Nutmeg
Charles Charles Stewart, Stewart, senior senior director director at at Moody's Moody's Analytics, Analytics, observed observed that that risk risk management management teams teams generally generally strive strive to do to do their their best best with with thethe resources resources that that they they have have available. available. ButBut as long as long as the as the activity activity is treated is treated as a as necessary a necessary evil evil rather rather than than as as a core a core strategic strategic cost cost of doing of doing business business (with (with thethe need need for for appropriate appropriate and and strategic strategic long-term long-term investment investment in in human human capital, capital, technology technology and and resources), resources), thethe poor poor management management of operational, of operational, market market andand credit credit risks risks will will continue continue to be to the be the downfall downfall of many of many a bank. a bank. One One bank bank risk risk manager manager with with an obvious an obvious interest interest in the in the matter matter said said that that the the quality quality is eroded is eroded through through poor poor reward reward structures structures for for risk risk personnel. personnel.
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This This Banana Banana Skin Skin would would have have come come higher higher up up thethe ranking ranking butbut for for thethe view view that, that, for for all all their their shortcomings, shortcomings, banks banks areare at least at least trying. trying. Susan Susan Rice, Rice, managing managing director, director, Scotland, Scotland, of of Lloyds Lloyds Banking Banking Group, Group, said said that that most most banks banks have have significantly significantly strengthened strengthened this this function function in recent in recent years. years.
11. 11.Pricing Pricing ofof risk risk (9) (9)

It was It was thethe gross gross underpricing underpricing of risk of risk by by banks banks that that contributed contributed to the to the 2008 2008 crisis. crisis. Have Have times times changed? changed? Some Some respondents respondents feltfelt that that banks banks hadhad learned learned thethe lessons lessons of 2008 of 2008 and and were were taking taking a much a much more more conservative conservative view view of risk of risk even even overpricing overpricing it. A it. UK A UK banker banker said: said: I I think think this this issue issue is now is now well well understood understood andand unlikely unlikely to recur to recur for for a long a long time. time. ButBut others others believed believed that that thethe quest quest for for profit profit andand thethe investment investment banks banks innate innate risk risk culture culture were were still still leading leading them them to underprice to underprice their their risks. risks. A regulator A regulator said said that that thisthis risk risk had had abated abated coming coming outout of the of the financial financial crisis crisis and and is now is now increasing increasing due due to a to a lack lack of of attractive attractive asset asset opportunities. opportunities. Another Another problem problem is that is that asset asset prices prices have have been been so distorted so distorted by by government government and and central central bank bank support support that that accurate accurate risk risk pricing pricing hashas become become much much more more difficult. difficult. Some Some respondents respondents also also said said that that risk risk asset asset weightings weightings andand capital capital adequacy adequacy requirements requirements set set by by regulators regulators were were adding adding to these to these distortions. distortions.
Banks Banks may may now now be be over-pricing over-pricing risk risk
12. 12.Business Business continuation continuation (21) (21)

Regulators Regulators are are counting counting on on recovery recovery and and resolution resolution plans plans (RRPs) (RRPs) to mitigate to mitigate future future banking banking crises: crises: banks banks will will have have to have to have pre-approved pre-approved plans plans to protect to protect thethe system system if if they they runrun into into trouble. trouble. ButBut will will these these plans plans be effective? be effective? There There was was a sharp a sharp divergence divergence of views of views among among respondents. respondents. Many Many feltfelt that that this this risk risk gotgot to the to the heart heart of the of the problem: problem: thethe interconnectedness interconnectedness of banks, of banks, thethe vulnerability vulnerability of of thethe system system to a to single a single failure, failure, and and thethe fact fact that that most most governments governments no no longer longer have have the the resources resources to rescue to rescue banks. banks. A regulator A regulator said said that that with with governments governments unable unable to stand to stand behind behind banks, banks, any any bank bank failure failure would would have have contagious contagious effects. effects. The The robustness robustness of RRPs of RRPs was was therefore therefore key. key. David David Grace, Grace, associate associate director director at UBS, at UBS, said said that that business business continuation continuation management management (BCM) (BCM) is huge. is huge. Any Any issue/default issue/default or or BCM BCM event event would would have have a huge a huge knock-on knock-on impact impact on on other other participants. participants. Many Many respondents respondents saw saw RRPs RRPs as a as point a point of strength of strength in the in the system. system. The The vice-chairman vice-chairman of a of multinational a multinational bank bank said said that that if if anything, anything, this this is one is one of the of the few few areas areas where where risk risk is moderating, is moderating, andand a US a US bank bank regulator regulator said said that that new new SIFI SIFI [systemically [systemically important important financial financial institutions] institutions] regulations regulations and and resolution resolution regimes regimes will will eventually eventually help help mitigate mitigate this this risk. risk. ButBut other other respondents respondents feared feared that that RRPs RRPs missed missed thethe point. point. A banking A banking consultant consultant said said that that plans plans alone alone areare notnot going going to to make make thethe industry industry safer. safer. Structural Structural change change is is required required andand a better a better prudential prudential understanding understanding of of thethe networks networks and and dependencies dependencies between between banks. banks. RRPs RRPs should should help help with with thisthis but but there there needs needs to be to the be the recognition recognition that that they they areare a tool, a tool, andand that that more more fundamental fundamental change change is required. is required.
Will Will resolution resolution plans plans stave stave off off a crisis? a crisis?
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RRPs RRPs might might even even be counter-productive be counter-productive in providing in providing a false a false sense sense of security. of security. FewFew countries countries have have formally formally adopted adopted them them (only (only the the UK UK and and Switzerland Switzerland according according to to one one respondent) respondent) and and the the areaarea is rife is rife with with legal legal uncertainty uncertainty over over bankruptcy bankruptcy laws. laws. Clive Clive Briault, Briault, formerly formerly a senior a senior UK UK banking banking regulator, regulator, nownow adviser adviser to KPMG, to KPMG, saidsaid that that given given the the under-developed under-developed state state of resolution of resolution planning, planning, it would it would be foolish be foolish to to relyrely yet on yetthese on these plans plans acting acting as aas defence a defence barrier. barrier.
13. 13. Back Back office office (24) (24)

TheThe risks risks in the in the back back office office (systems, (systems, datadata management, management, custody, custody, technical technical controls controls etc.) etc.) have have risen risen sharply sharply up the up ranking, the ranking, for two for two reasons: reasons: the stresses the stresses of the of crisis the crisis and and the the extra extra demands demands imposed imposed by new by new regulation. regulation. As As one one respondent respondent said, said, the the less less banks banks trust trust each each other, other, likelike now, now, the the more more important important it isitthat is that back back office office systems systems should should not fail. not fail.
Regulatory Regulatory change change is is adding adding to to the the stresses stresses onon the the back back office office
For For many many respondents, respondents, this this waswas still still a Cinderella a Cinderella areaarea which which managements managements preferred preferred not not to get to get involved involved with, with, or allocate or allocate the the necessary necessary investment investment despite despite the the obvious obvious risks, risks, viz. viz. the the recent recent rogue rogue trading trading incident incident at UBS. at UBS. TheThe head head of of We We seem seem to make to make life life overly overly complicated complicated by having by having the the processing processing operational operational riskrisk at aat large a large UK UK bank bank of transactions of transactions travel travel all around all around the the sawsaw revenue revenue pressures pressures creating creating an an world, world, sometimes sometimes on several on several endless endless cycle cycle of cost-cutting of cost-cutting in an in an occasions. occasions. environment environment of of heightened heightened Project Project manager, manager, German German bank bank operational operational risk. risk. Complexity Complexity waswas a word a word thatthat cropped cropped up in upmany in many responses: responses: back back office office systems systems are now are now so complicated so complicated that that they they are beyond are beyond the comprehension the comprehension of all ofbut all but a few a few key key staff. staff. Alasdair Alasdair Steele, Steele, partner partner at City at City law law firm firm Nabarro, Nabarro, saidsaid that that thethe ability ability of of senior senior management management to understand to understand all the all the complex complex areas areas in sufficient in sufficient detail detail to allow to allow them them to challenge to challenge the the assessment assessment of the of the operating operating managers managers becomes becomes considerably considerably greater greater when when there there are multiple are multiple complex complex business business lines. lines. Complexity Complexity may may alsoalso grow grow if, as if,many as many expect, expect, the banking the banking industry industry now now goes goes through through a phase a phase of restructuring. of restructuring. TheThe regulatory regulatory tsunami tsunami is also is also having having an impact. an impact. A respondent A respondent from from Japan Japan saidsaid that that systems systems risked risked being being overwhelmed overwhelmed by the by the rushed rushed implementation implementation of Dodd-Frank, of Dodd-Frank, Basel Basel 3, MiFID 3, MiFID 2 etc. 2 etc. and and a risk a risk director director at a at large a large Swiss Swiss bank bank said: said: Complexity Complexity is is not the not issue; the issue; its the its level the level of regulation of regulation being being layered layered onto onto banks banks to track to track it. it. However, However, respondents respondents alsoalso felt felt that that back back offices offices were were standing standing up well, up well, considering, considering, and and that that the the risks risks were were exaggerated. exaggerated. Paul Paul Smee, Smee, director director general general of the of the UKs UKs Council Council of Mortgage of Mortgage Lenders, Lenders, saidsaid thatthat bank bank systems systems seem seem remarkably remarkably robust. robust.
14. 14. Management Management incentives incentives (16) (16)

Concern Concern about about bankers bankers bonuses bonuses has has risen risen since since the the last last survey survey because because they they are are such such a visible a visible partpart of the of the problem, problem, and and not not much much seems seems to have to have been been done done about about them them despite despite a number a number of regulatory of regulatory initiatives. initiatives. But But having having saidsaid that, that, many many respondents respondents thought thought that that the risks the risks were were reputational reputational rather rather thanthan financial. financial. TheThe casecase against against incentives incentives is familiar: is familiar: they they encourage encourage short-termism short-termism and and excessive excessive risk-taking, risk-taking, and and are are mostly mostly upside. upside. Alan Alan Peachey, Peachey, a banker a banker who who compiled compiled Great Great Financial Financial Disasters Disasters of our of our Time Time , said , said that that most most of the of hundreds the hundreds of incidents of incidents listed listed in in the the book book were were caused caused by dealers by dealers taking taking unacceptable unacceptable risks risks in order in order to create to create
The The debate debate about about bankers bankers bonuses bonuses continues continues
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sufficient sufficient profits profits to generate to generate bonuses. bonuses. These These comments comments apply apply not not only only to treasury to treasury operations operations but but also also to other to other areas areas of an of an institution institution such such as customer as customer business business andand investments. investments. Nor, Nor, judging judging by by the the responses, responses, was was thisthis justjust a problem a problem in the in the developed developed worlds worlds greedy greedy banks. banks. The The chief chief auditor auditor of a of large a large Malaysian Malaysian bank bank said said thatthat insufficient insufficient attention attention andand resources resources are are given given to to good good governance governance because because most most senior senior executives executives think think thatthat it impedes it impedes growth, growth, which which in turns in turns impedes impedes their their bonuses. bonuses. The The realreal cause cause for for concern concern for for many many respondents respondents was was whether whether bankers bankers propose propose to do to do anything anything about about them. them. Christopher Christopher O'Brien, O'Brien, director director of of the the Centre Centre for for Risk Risk andand Insurance Insurance Studies Studies at the at the University University of Nottingham, of Nottingham, said said thatthat bankers bankers justjust haven't haven't learned learned the the lessons lessons on this, on this, andand don't don't seem seem to care, to care, andand a central a central banker banker said said he had he had no no problem problem with with incentive incentive paypay so long so long as it aswas it was based based on on reality. reality. But But the the senior senior management management of banks of banks andand their their boards boards have have got got completely completely outout of touch of touch with with the the restrest of society of society when when it comes it comes to remuneration, to remuneration, andand for for no good no good reason. reason. ButBut the the counter counter view view was was thatthat the the bonus bonus issue issue is, is, in the in the words words of of oneone of of the the respondents, respondents, massively massively overrated. overrated. A director A director of prudential of prudential regulation regulation said said thatthat the the level level of bank of bank paypay is offensive is offensive andand unjustified. unjustified. However, However, the the role role of remuneration of remuneration in in encouraging encouraging risky risky behaviour behaviour is hopelessly is hopelessly exaggerated. exaggerated. Many Many respondents respondents pointed pointed out out that, that, faced faced with with political political andand regulatory regulatory pressure, pressure, banks banks are are trying trying to curb to curb bonuses bonuses andand link link them them to more to more fundamental fundamental measures measures of performance. of performance. The The chief chief financial financial officer officer of a of large a large Canadian Canadian bank bank said said thatthat while while the the issue issue of bankers of bankers paypay was was overblown overblown from from the the soundness soundness perspective, perspective, it it cancan become become a reputational a reputational issue issue for for banks, banks, especially especially where where they they are are bailed bailed out. out.
15. 15.Change Change management management (28) (28)

AA lot lot ofof restructuring restructuring lies lies ahead ahead
In earlier In earlier Banana Banana Skin Skin surveys, surveys, we we asked asked respondents respondents to rank to rank the the riskrisk of merger of merger mania, mania, which which usually usually came came out out low low on on the the scale. scale. ButBut with with a lot a lot of restructuring, of restructuring, deleveraging, deleveraging, downsizing downsizing andand general general strategic strategic rethinking rethinking going going on, on, we we thought thought it it more more instructive instructive to probe to probe the the risks risks in the in the wider wider process process of crisis-driven of crisis-driven change. change. And And clearly, clearly, there there are are causes causes for for concern. concern. Philip Philip Middleton, Middleton, head head of of central central banking banking at Ernst at Ernst & Young, & Young, said said that that current current problems problems were were likely likely to lead to lead to to severe severe uncertaintyand uncertaintyand the the most most fundamental fundamental restructuring restructuring in in European European ButBut the the banking banking industry industry hashas a mixed a mixed record record financial financial services services in a ingeneration. a generation. when when it comes it comes to big to big strategic strategic moves, moves, andand ourour respondents respondents were were quick quick to remind to remind us us of the of the sorry sorry examples examples of Royal of Royal Bank Bank of Scotlands of Scotlands acquisition acquisition of ABN of ABN Amro, Amro, andand Lloyds Lloyds Banking Banking Groups Groups politically politically enforced enforced merger merger with with HBOS. HBOS. Much Much of the of the structural structural change change thatthat lieslies ahead ahead will will be driven be driven by regulatory by regulatory pressure pressure to to reduce reduce the the size size of banks of banks thatthat are are too too bigbig to fail, to fail, and, and, as one as one respondent respondent pointed pointed out: out: Changes Changes resulting resulting from from regulatory regulatory requirements requirements are are particularly particularly difficult difficult to to manage manage efficiently. efficiently. A further A further problem problem is that is that a lot a lot of change of change will will be taking be taking place place at at once, once, adding adding to the to the uncertainty uncertainty andand affecting affecting prices. prices. A banking A banking consultant consultant foresaw foresaw a a situation situation where where many many banks banks are are seeking seeking to divest to divest at the at the same same time. time. Who Who andand where where are are the the buyers? buyers? All All thisthis could could bring bring on restructuring on restructuring fatigue. fatigue. Nonetheless, Nonetheless, many many respondents respondents thought thought restructuring restructuring was was a necessary a necessary step step to restore to restore health health to a tobloated a bloated andand over-complex over-complex banking banking system. system. A central A central banker banker said said thatthat short short term term losses losses will will quickly quickly turn turn into into longer longer term term strengths strengths andand sustainability. sustainability. All All diets diets have have short short term term costs costs but but a slim a slim waistline waistline provides provides a new a new lease lease of life. of life.
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16. 16.Hedge Hedge funds funds (19) (19)
Although Although hedge hedge funds funds continue continue to be to seen be seen as a as middling a middling risk, risk, the the responses responses reflected reflected a growing a growing sense sense of unease of unease about about the the wider wider shadow shadow banking banking sector: sector: its its size size andand opacity, opacity, andand the the lack lack of regulation. of regulation.
The The shadow shadow banking banking sector sector could could benefit benefit from from current current trends trends
Stewart Stewart Fleming, Fleming, a financial a financial commentator commentator andand associate associate fellow fellow at Chatham at Chatham House, House, said: said: I continue I continue to worry to worry about about the the unexpected unexpected There There are are too too many many areas areas of the of the global global financial financial system system about about which which we we know know far far too too little. little. One One riskrisk is that is that the the regulatory regulatory squeeze squeeze now now being being applied applied to banks to banks will will drive drive business business into into the the shadow shadow banking banking sector sector where where their their activities activities will will be less be less closely closely scrutinised. scrutinised. Morten Morten N. Friis, N. Friis, chief chief riskrisk officer officer at the at the Royal Royal Bank Bank of Canada, of Canada, said said thatthat regulatory regulatory changes changes are are causing causing renewed renewed growth growth of the of the unregulated unregulated shadow shadow banking banking system. system. ButBut there there was was also also a lot a lot of sympathy of sympathy for for hedge hedge funds: funds: respondents respondents pointed pointed out out that, that, contrary contrary to the to the popular popular view, view, particularly particularly on on the the Continent, Continent, many many of them of them did did not not engage engage in short-selling, in short-selling, thatthat they they were were a source a source of liquidity, of liquidity, andand thatthat they they provided provided services services thatthat mainstream mainstream banks banks no no longer longer wanted wanted to or to could. or could. Stuart Stuart Trow, Trow, credit credit strategist strategist at the at the European European Bank Bank for for Reconstruction Reconstruction andand Development, Development, pointed pointed out out thatthat hedge hedge funds funds might might help help in terms in terms of being of being among among the the fewfew buyers buyers of assets of assets the the banks banks need need to unload. to unload.
17. 17.Interest Interest rates rates (14) (14)

The The outlook outlook seen seen by most by most respondents respondents is for is for a long a long period period of low of low interest interest rates, rates, andand little little volatility. volatility. The The risks risks lie lie lessless in uncertainty in uncertainty about about raterate movements movements than than in the in the persistence persistence of low of low yields yields andand a flat a flat yield yield curve, curve, both both of which of which complicate complicate the the job job of of making making banking banking profits. profits. Peter Peter Hahn Hahn of Londons of Londons Cass Cass Business Business School School said said thatthat the the riskrisk is that is that income income generation generation will will be weak be weak in a in low a low rate, rate, lowlow demand demand environment. environment. A regulator A regulator said said thatthat current current lowlow rates rates are are squeezing squeezing bank bank margins margins andand contributing contributing to to lower lower earnings. earnings. Any Any rate rate shock shock up up would would lead lead to to immediate immediate losses losses on on investment investment portfolios. portfolios. Double Double jeopardy jeopardy for for interest interest rates rates makes makes thisthis a certain a certain high high risk. risk. Aaron Aaron Brown, Brown, a risk a risk manager manager at AQR at AQR Capital Capital Management Management in the in the US, US, made made the the point point thatthat since since interest interest rates rates are are being being manipulated manipulated for for the the benefit benefit of banks of banks this this is is likely likely to be to a be source a source of support, of support, not not a source a source of risk. of risk. ButBut the the chief chief executive executive of a of a UKUK building building society society pointed pointed up the up the other other side side to this to this coin: coin: By By assisting assisting the the banks, banks, the the government government are are making making lifelife more more difficult difficult for for building building societies. societies. Interest Interest rates rates need need to be to increased be increased to assist to assist margins margins in the in the sector. sector. Some Some respondents respondents also also wondered wondered whether whether the the concept concept of a of risk-free a risk-free rate rate of return of return could could stillstill be be said said to exist, to exist, given given thatthat so many so many sovereign sovereign borrowers borrowers hadhad now now lostlost their their triple triple A status. A status. David David Shirreff, Shirreff, European European business business correspondent correspondent of of TheThe Economist Economist , said , said thatthat even even if the if the euro euro is saved, is saved, the the banks banks face face a revolution a revolution in the in the concept concept of of what what is risk-free. is risk-free. Where Where do do they they stash stash capital capital if not if not in high-grade in high-grade sovereign sovereign bonds? bonds?
Steady Steady outlook outlook for for interest interest rates rates
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18. 18.High High dependence dependence on on technology technology (18) (18)
Banking Banking technology technology is is undergoing undergoing a a tough tough test test
This This is not is not the the high high profile profile endend of the of the riskrisk business, business, but but a key a key oneone nonetheless nonetheless as as banking banking becomes becomes more more technology technology driven. driven. As As a Japanese a Japanese respondent respondent said: said: The The banking banking industry industry is effectively is effectively a technology a technology industry. industry. Geographically, Geographically, thisthis was was a a conspicuous conspicuous concern concern in the in the FarFar East, East, notably notably China. China. The The concerns concerns are are twofold. twofold. One One is the is the adequacy adequacy of banks of banks plans plans to deal to deal with with failure failure in in a high a high impact, impact, albeit albeit lowlow probability, probability, area. area. Worries Worries centred centred on on the the level level of of management management understanding understanding of technology, of technology, andand banks banks high high dependence dependence on on a few a few keykey people. people. One One respondent respondent said said thatthat too too many many process process critical critical IT staff IT staff are are being being fired fired short short term term focused focused management management decisions. decisions. Many Many respondents respondents expected expected that that the the robustness robustness of of bank bank technology technology would would be be severely severely tested tested by by the the current current banking banking conditions. conditions. There There was was anan increased increased riskrisk at at present present duedue to to a nervous a nervous andand volatile volatile market market background background amplifying amplifying the the consequences, consequences, though though not not the the probability, probability, of failure, of failure, said said a respondent a respondent from from oneone of of the the German German Landesbanks. Landesbanks. The The other other concern concern is vulnerability is vulnerability to hacking. to hacking. A respondent A respondent from from a large a large US US clearing clearing house house said: said: I think I think thisthis riskrisk is much is much underrated. underrated. Dependence Dependence on technology on technology is huge, is huge, andand there there hashas been been a sharp a sharp increase increase in cyber in cyber crime crime which which cancan cause cause damage. damage. Witness Witness Sony, Sony, which which isnt isnt a bank a bank obviously, obviously, butbut the the principle principle is established. is established. A US A US regulator regulator said said thatthat the the realreal worry worry is the is the increasing increasing sophistication sophistication of hackers. of hackers. Some Some respondents respondents feltfelt thatthat these these risks risks were were manageable. manageable. A Swiss A Swiss banker banker said said thatthat the the complexity complexity of the of the business business is decreasing is decreasing following following regulatory regulatory reform. reform.
19. 19.Currencies Currencies (11) (11)

A surprise, A surprise, perhaps, perhaps, to see to see thisthis riskrisk so lowly so lowly rated rated given given the the crisis crisis in the in the eurozone. eurozone. ButBut there there is clearly is clearly a distinction a distinction to be to be made made between between the the macro-economic macro-economic risks risks associated associated with with a troubled a troubled currency currency union union (which (which are are seen seen to be to huge), be huge), andand the the more more specific specific risks risks in currency in currency trading. trading. Here, Here, as many as many respondents respondents pointed pointed out, out, the the banks banks have have a lot a lot of experience of experience and and might might even even see see currency currency upheaval upheaval as an as important an important source source of business. of business.
Currency Currency is is seen seen asas a low a low risk risk despite despite the the euro euro
Nonetheless, Nonetheless, the the euro euro was was the the focus focus of most of most responses, responses, partly partly because because of potential of potential turbulence, turbulence, but but also also because because it could it could throw throw up some up some unfamiliar unfamiliar risks. risks. One One said said thatthat a euro a euro meltdown meltdown seems seems almost almost certain. certain. Any Any break-up break-up of such of such a system a system of fixed of fixed exchange exchange rates rates will will be loss be loss making making for for some. some. If itIfoccurs, it occurs, fragmentation fragmentation of the of the eurozone eurozone would would almost almost certainly certainly result result in currency in currency redenomination, redenomination, with with a tangle a tangle of difficult of difficult legal legal issues. issues. One One respondent respondent said: said: Look Look at Greek at Greek euros. euros. What What would would happen happen to all to all sorts sorts of contracts of contracts in the in the event event of exit of exit / / enforced enforced exchange exchange to new to new currency currency / devaluation / devaluation / effect / effect of exchange of exchange controls controls / / investment investment currency currency premium premium etc.? etc.? ButBut some some respondents respondents feltfelt that that banks banks might might even even profit profit from from a break-up: a break-up: the the volatility volatility would would generate generate a lot a lot of of business, business, andand if the if the crisis crisis resulted resulted in in more more currencies currencies to trade, to trade, bully bully for for the the banks. banks. The The riskrisk director director of a of Finnish a Finnish bank bank said said thatthat the the dismantling dismantling of the of the euro euro might might bring bring in new in new risks, risks, but but on on the the other other hand hand also also opportunities. opportunities.
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ForFor once once in this in this long-running long-running survey, survey, the the dollar dollar andand the the renminbi renminbi earned earned scarcely scarcely a a mention, mention, andand the the phrase phrase currency currency wars wars did did not not appear appear at all, at all, suggesting suggesting thatthat the the focus focus of currency of currency riskrisk has has undergone undergone a major a major shift. shift.
20. 20.Business Business practices practices (22) (22)

With With all the all the scandals scandals over over mis-selling mis-selling in recent in recent years, years, banking banking business business practices practices should should be be improving. improving. Many Many respondents respondents thought thought thatthat the the banks banks understood understood the the problem problem andand were were responding responding to regulatory to regulatory pressure. pressure. A senior A senior Canadian Canadian banker banker said said thatthat this this is ais risk, a risk, but but the the industry industry is more is more aware aware of it, ofand it, and applies applies more more rigour. rigour.
Conduct Conduct of of business business needs needs toto improve improve
In the In the US,US, the the creation creation of the of the Consumer Consumer Financial Financial Protection Protection Bureau Bureau willwill lead lead to to much much closer closer regulation regulation of bank of bank practices practices in consumer in consumer financial financial products, products, including including mortgages mortgages andand credit credit cards. cards. Similarly, Similarly, in the in the UK, UK, the the arrival arrival of the of the new new Financial Financial Conduct Conduct Authority Authority is expected is expected to have to have a powerful a powerful effect. effect. One One head head of regulatory of regulatory andand operational operational riskrisk said said thatthat conduct conduct of business of business is the is the greatest greatest riskrisk with with the the FCA FCA the the spectre spectre at the at the gate. gate. ButBut others others were were lessless optimistic, optimistic, which which may may be be why why thisthis riskrisk has has risen risen up up the the rankings rankings a bit. a bit. HasHas there there really really been been much much change? change? A central A central banker banker thought thought the the riskrisk waswas quite quite high, high, as for as for most most customers customers the the banks banks seem seem to be to be operating operating in in another another space-time space-time dimension dimension hence hence the the Occupy Occupy movement. movement. They They do do need need to to think think andand act act differently. differently. Also, Also, the the riskrisk of legal of legal action action for for past past misdeeds misdeeds remains. remains. Some Some respondents respondents felt felt that, that, as the as the banks banks came came under under profit profit pressure, pressure, thisthis waswas an area an area where where standards standards could could easily easily slip. slip. One One of them of them said: said: Using Using the the UKUK as an as example, an example, it appears it appears thatthat banks banks have have not not learned learned their their lesson lesson from from past past mis-selling mis-selling scandals. scandals. Banks Banks must must improve improve their their act act in this in this area, area, but but in reality in reality they they are are being being pushed pushed to find to find abnormal abnormal profits profits at the at the expense expense of their of their weakest weakest retail retail clients clients by the by the need need to boost to boost earnings earnings to generate to generate the the new new higher higher levels levels of capital of capital required required by Basel by Basel 3. 3. One One problem problem highlighted highlighted by respondents by respondents waswas thatthat thisthis waswas more more of a ofreputational a reputational than than a financial a financial risk, risk, andand hadhad little little material material impact impact on banks on banks performance, performance, so banks so banks could could take take calculated calculated risks risks if they if they chose chose to. to. One One of them of them said: said: It is Itais peculiarity a peculiarity of of banking banking thatthat major major banks banks cancan be involved be involved in repeated in repeated mis-selling mis-selling scandals scandals without without going going out out of business. of business. Maybe Maybe reputations reputations in banking in banking are are now now so low so low thatthat it isithard is hard to to incur incur reputational reputational loss. loss.
21. 21.Equity Equity markets markets (10) (10)

TheThe riskrisk thatthat banks banks willwill lose lose money money through through the the equity equity markets markets is not is not seen seen to be to be high: high: direct direct exposure exposure is limited is limited andand proprietary proprietary trading trading is being is being discouraged discouraged by the by the regulators. regulators. However However an equity an equity market market collapse collapse would would have have consequences consequences thatthat would would affect affect banks banks through through a fall a fall in general in general economic economic growth growth andand in the in the value value of their of their collateral collateral and and in lower in lower financial financial confidence. confidence. If there If there are are direct direct risks, risks, they they lie more lie more in the in the lossloss of revenue of revenue from from brokerage brokerage activities activities on behalf on behalf of clients, of clients, or through or through losses losses suffered suffered by the by the clients clients themselves. themselves. A regulator A regulator said said thatthat thisthis waswas a modest a modest risk. risk. But, But, as seen as seen from from the the internet internet bubble bubble equity equity correction, correction, not not nearly nearly as impactful as impactful as aas debt a debt driven driven crisis, crisis, andand a Swiss a Swiss banker banker said said it it waswas moderate moderate as aas risk a risk andand comparatively comparatively easy easy to manage to manage andand hedge. hedge.
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The The view view from from thethe flipflip side side
While While bankers bankers in industrial in industrial countries countries weigh weigh the risks the risks in developing in developing markets, markets, there there is a flip is a side flip to side this: to this: the emerging the emerging markets markets concerns concerns that the thattroubles the troubles of of industrial industrial economies economies will hit will their hit their own growth own growth prospects. prospects. A USA regulator US regulator said said that given that given the dependence the dependence of the ofwestern the western world world on growth on growth from from emerging emerging markets, markets, this is this a much is a much moremore material material issueissue today. today. The chief The chief financial financial officer officer of a large of a large Chinese Chinese development development bankbank said that said the that the uncertainties uncertainties about about the world the world economy economy plus upward plus upward pressure pressure on the onrenminbi the renminbi have have led to led a sharp to a sharp drop drop in export in export orders orders in China, in China, whilewhile the growing the growing sense sense of of risk in risk banking in banking markets markets was causing was causing funds funds to flow to increasingly flow increasingly out of out emerging of emerging market market countries, countries, including including China, China, [leading [leading to a] to shrinking a] shrinking of domestic of domestic market market liquidity liquidity and surging and surging inter-bank inter-bank interest interest rates. rates. These These concerns concerns werewere echoed echoed by respondents by respondents in many in many partsparts of the ofworld. the world. The The chief chief economist economist of a bank of a bank in Namibia in Namibia said that said the that biggest the biggest challenge challenge is how is the how the current current sovereign sovereign debt debt crisiscrisis will unfold will unfold over over the next the next threethree years years and impact and impact the global the global growth growth outlook outlook and in and turn in affect turn affect the operating the operating environment. environment. The The executive executive vice-president vice-president of a large of a large bankbank in the inPhilippines the Philippines was worried was worried that that over over the next the next two to two three to three years, years, the industry the industry will not willbe not able be to able absorb to absorb the the shockwaves shockwaves from from the geo-political the geo-political arena arena where where the US, theChina US, China and Europe and Europe are aare a virtual virtual powder powder keg that keg may that may explode explode if notifmanaged not managed well. well. In several In several countries, countries, there there is concern is concern about about the knock-on the knock-on effect effect of a collapse of a collapse in in banking banking confidence. confidence. In Romania, In Romania, a senior a senior bankers bankers top worry top worry was the was lack the of lack of trust trust in banks in banks and excessive and excessive coverage coverage of bad of news bad news about about banks, banks, and a and Turkish a Turkish banker banker said that said the thatlack the lack of confidence of confidence on the oninternational the international markets markets is making is making it hard it hard to raise to raise needed needed capital. capital. In Malaysia, In Malaysia, Ashok Ashok Ramamurthy, Ramamurthy, deputy deputy CEO CEO of of the AMM the AMM banking banking group, group, said that said financial that financial institutions institutions are facing are facing unprecedented unprecedented pressures pressures that require that require dynamic dynamic and clever and clever handling. handling. Not all Not FI's all FI's are equipped are equipped to deal to with deal with these these issues issues correctly! correctly! In Russia, In Russia, bankers bankers felt more felt more insulated insulated from from global global trends trends because because of the ofsize the of size of the economy the economy and its and relatively its relatively smallsmall banking banking exposure exposure to sovereign to sovereign debt.debt. However However therethere was concern was concern there, there, too, about too, about the countrys the countrys sluggish sluggish economy economy and the andgrowth the growth in credit in credit risk. risk. The head The head of risk of analysis risk analysis at one at of one the ofcountrys the countrys leading leading banks banks said that said credit that credit was one was one of the ofmain the main risks risks due to due the to the deteriorating deteriorating economic economic environment. environment. This survey This survey also drew also drew several several responses responses from from the microfinance the microfinance industry industry which which has found has found that it that is not it isimmune not immune to global to global pressures, pressures, and where and where concern concern about about the overindebtedness the overindebtedness of low ofincome low income borrowers borrowers is growing. is growing.
Developed Developed countries countries areare a powder a powder keg keg waiting waiting to to explode explode
In a separate In a separate context, context, banks banks need need healthy healthy equity equity demand demand if they if they are to are raise to raise the large the large amounts amounts of new of new capital capital demanded demanded by regulators, by regulators, and persistent and persistent weakness weakness in these in these markets markets would would be a hindrance. be a hindrance.
22. 22. Emerging Emerging markets markets (17) (17)

Views Views about about the risks the risks in emerging in emerging markets markets werewere very very divided. divided. Many Many respondents respondents said said that, that, whatever whatever their their prospects, prospects, the risks the risks in these in these countries countries werewere minimal minimal compared compared to those to those in developed in developed markets. markets. More More than than that: that: many many of of thesethese markets markets were, were, relatively relatively speaking, speaking, strong, strong, and a and source a source of stability of stability for the for the world world economy. economy. TheyThey also also had had governments governments which which could could respond respond much much moremore effectively effectively to global to global shocks shocks than than thosethose of mature of mature markets. markets. Alexander Alexander Hoare, Hoare, managing managing partner partner of C.of Hoare C. Hoare & Co &in Co the inUK, the UK, said: said: I regard I regard Africa Africa as less as risky less risky
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than than Europe Europe inin some some senses, senses, and and Gerard Gerard Lyons, Lyons, chief chief economist economist at at Standard Standard Chartered, Chartered, said said that that inin contrast contrast toto the the debt debt and and deleveraging deleveraging ofof the the West, West, the the economic economic environment environment inin the the East East is is a big a big opportunity. opportunity.
Emerging Emerging markets markets look look in in better better shape shape than than developed developed markets markets
Nonetheless, Nonetheless, there there was was a strong a strong current current ofof concern concern inin the the responses responses about about emerging emerging markets markets ability ability toto spring spring nasty nasty surprises. surprises. The The big big uncertainty uncertainty is is China China which which many many respondents respondentssaid saidwas wasbecoming becominga a worry worry (See (See box box p12). p12). Elsewhere, Elsewhere, aa respondent respondent warned warned that that over-rapid over-rapid growth growth inin the the BRICS BRICS and and Turkey Turkey is isa athreat, threat,and andwhen whenthis this slows, slows, I I believe believe banks banks in in those those countries countries will will turn turn out out toto bebe sitting sitting onon significant significant asset asset quality quality problems. problems. AA respondent respondent from from South South Asia Asia said said that that growth growth inin India India has has already already declined declined dramatically, dramatically, and and growth growth in in Bangladesh Bangladesh and and Nepal Nepal has has been been galloping galloping ahead ahead too too quickly. quickly. Well Well see see more more consolidation consolidation inin the the sector, sector, which which is is not not necessarily necessarily a bad a bad thing thing inin the the long long run. run. But But inin the the short short term, term, it it means means less less access access toto finance. finance. Were Were certainly certainly seeing seeing this this in in India. India. There There was was also also concern concern about about funding funding and and credit credit quality quality inin responses responses from from Latin Latin America. America.
The The increasing increasing unemployment unemployment in in people people under under the the age age of of 35 35 and and the the resultant resultant lack lack of of acceptable acceptable living living standards standards and and access access toto basic basic services services is is leading leading toto social social unrest unrest that that will will spread, spread, especially especially in in developing developing countries. countries. This This threatens threatens toto destabilise destabilise countries countries where where financial financial institutions institutions will will be be severely severely affected. affected. Philip Philip Wessels, Wessels, chief chief risk risk officer, officer, Nedbank, Nedbank, South South Africa Africa
23. 23. Rogue Roguetrader trader(20) (20)

Despite Despite the the incident incident at at UBS UBS aa few few months months ago, ago, rogue rogue trader trader risk risk is is little little changed changed from from last last time, time, with with most most respondents respondents seeing seeing it it asas anan ongoing ongoing business business hazard hazard which which seldom seldom has has more more than than local local implications. implications. AA senior senior investment investment banker banker said said this this was was always always a risk a risk but but unlikely unlikely toto bebe asas material material asas other other areas. areas. Nonetheless, Nonetheless, the the UBS UBS case case accelerated accelerated management management and and strategic strategic changes changes at at the the bank bank and and will will doubtless doubtless have have prompted prompted risk risk reviews reviews at at allall itsits competitors competitors asas well well asas closer closer regulatory regulatory scrutiny. scrutiny. AA Swiss Swiss trust trust banker banker said: said: One One would would hope hope other other banks banks have have heard heard the the footsteps footsteps post post UBS. UBS. Also, Also, tougher tougher economic economic times, times, along along with with cuts cuts inin bonuses bonuses and and volatile volatile markets, markets, may may create create aa breeding breeding ground ground for for more more unauthorised unauthorised trading. trading. One One question question is is whether whether the the size size and and complexity complexity ofof financial financial institutions institutions makes makes them, them, inin the the words words ofof aa respondent, respondent, the the perfect perfect adventure adventure playground playground for for rogue rogue traders traders which which nono amount amount ofof control control will will correct, correct, oror whether whether the the downsizing downsizing and and tougher tougher regulation regulation that that banks banks are are now now going going through through will will make make it it harder harder for for rogue rogue traders traders toto get get away away with with it.it. If If theres theres one one thing thing rogue rogue traders traders are are good good at,at, it it is is finding finding new new ways ways toto crack crack the the system. system.
Banks Banks make make the the perfect perfect playground playground for for rogue rogue traders traders
24. 24. Criminality Criminality(27) (27)

The The risks risks ofof fraud, fraud, hacking, hacking, cyber cyber attack, attack, theft theft ofof confidential confidential information information etc. etc. are are seen seen toto bebe low low order, order, at at least least compared compared toto allall the the other other risks risks around. around.Many Many respondents respondents said said that that banks banks have have strong strong controls controls inin place, place, that that regulators regulators are are keeping keeping a close a close eye eye on on problems problems like like money money laundering, laundering, and and that, that, asas one one risk risk manager manager said, said, while while aa constant constant threat, threat, it it will will not not bring bring down down many many banks banks without without insider insider involvement. involvement. Ian Ian Bancroft, Bancroft, a managing a managing director director ofof the the Cayman Cayman National National Bank Bank and and
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Trust Trust Trust Company, Company, Company, said said said hehe he didnt didnt didnt see see see any any any pressing pressing pressing concerns concerns concerns in in in this this this area area area over over over and and and above above above those those those that that that have have have arisen arisen arisen over over over the the the past past past few few few years. years. years.
Cyber Cyber Cyber attacks attacks attacks on on on banks banks banks are are are growing growing growing
But But But there there there are are are risks. risks. risks. One One One is that is is that that crime crime crime tends tends tends to to rise to rise rise during during during a recession. a a recession. recession. Another Another Another is the is is the the growing growing growing sophistication sophistication sophistication of of of criminals, criminals, criminals, especially especially especially in in in the the the electronic electronic electronic world world world at at at a time a a time time when when when more more more financial financial financial business business business is is is being being being digitised. digitised. digitised. The The The director director director of of of legal legal legal and and and compliance compliance compliance at at a atDutch a a Dutch Dutch bank bank bank said said said that that that criminals criminals criminals get get get smarter smarter smarter byby by the the the week. week. week. This This This is is a is a a huge huge huge risk risk risk to to to banks. banks. banks. AA A third third third is is is bank bank bank vulnerability vulnerability vulnerability to to to tougher tougher tougher tax tax tax disclosure disclosure disclosure requirements, requirements, requirements, such such such as as as the the the US US US FATCA, FATCA, FATCA, and and and the the the general general general push push push byby by cash-strapped cash-strapped cash-strapped governments governments governments to to pursue to pursue pursue tax tax tax evaders. evaders. evaders. Many Many Many respondents respondents respondents made made made the the the point point point that that that the the the real real real risk risk risk is is is not not not monetary monetary monetary loss loss loss or or or destabilisation, destabilisation, destabilisation, but but but reputation. reputation. reputation. The The The head head head of of operational of operational operational risk risk risk at at a atlarge a a large large UK UK UK bank bank bank said said said that that that the the the exposure exposure exposure is is is principally principally principally a a reputational a reputational reputational risk. risk. risk. It It It is is is unlikely unlikely unlikely to to to bebe be lifelifelifethreatening threatening threatening in in the inthe the short-term. short-term. short-term.
25. 25. 25.Sustainability Sustainability Sustainability (25) (25) (25)

Some Some Some respondents respondents respondents wondered wondered wondered why why why we we we bothered bothered bothered to to ask to ask ask a question a a question question about about about the the the risks risks risks to to to the the the long-term long-term long-term sustainability sustainability sustainability of of of the the the banking banking banking business: business: business: itsits its reputation, reputation, reputation, itsits its ethics, ethics, ethics, itsits its social social social utility. utility. utility. It It was It was was hard, hard, hard, they they they replied, replied, replied, to to see to see see things things things getting getting getting any any any worse. worse. worse. But But But if if so, if so, so, why why why does does does this this this risk risk risk come come come so so far so far far down down down the the the list? list? list? Here, Here, Here, opinions opinions opinions were were were divided. divided. divided. The The The more more more generous-minded generous-minded generous-minded felt felt felt that that that the the the banks banks banks were were were trying trying trying to to to dodo do better, better, better, partly partly partly out out out of of of self-interest, self-interest, self-interest, partly partly partly under under under intense intense intense political political political and and and regulatory regulatory regulatory pressure. pressure. pressure. Bankers Bankers Bankers understood understood understood that that that the the the lack lack lack of of confidence of confidence confidence in in their in their their industry industry industry was was was not not not just just just a moral a a moral moral question question question but but but a matter a a matter matter of of of business business business survival. survival. survival. It It was It was was therefore therefore therefore unfair unfair unfair that that that they they they should should should continue continue continue to to be to be be assailed assailed assailed byby by popular popular popular Occupy Occupy Occupy movements movements movements and and and daily daily daily bashing bashing bashing byby by the the the media media media and and and politicians. politicians. politicians. AA banking A banking banking consultant consultant consultant said said said that that that this this this risk risk risk would would would bebe be higher higher higher except except except for for for the the the current current current regulatory regulatory regulatory pressure pressure pressure which which which is is forcing is forcing forcing the the the banking banking banking industry industry industry to to respond to respond respond and and and make make make changes changes changes in in this inthis this area. area. area.
The The The bail-out bail-out bail-out of of banks of banks banks through through through the the the TARP TARP TARP funds funds funds has has has already already already created created created a a a lack lack lack of of trust of trust trust and and and faith faith faith in in financial in financial financial institutions institutions institutions with with with the the the general general general public. public. public. The The The financial financial financial industry industry industry must must must dodo do a better a a better better job job job of of explaining of explaining explaining how how how they they they have have have repaid repaid repaid these these these funds, funds, funds, and and and are are are now now now better better better positioned positioned positioned to to help to help help the the the economy economy economy recover. recover. recover. Financial Financial Financial institutions institutions institutions must must must lend lend lend money money money in in such in such such a a a way way way as as as to to create to create create domestic domestic domestic jobs, jobs, jobs, or or we or we we will will will continue continue continue fighting fighting fighting this this this reputational reputational reputational / lack // lack lack of of trust of trust trust issue. issue. issue. Edwin Edwin Edwin A. A. A. Link, Link, Link, senior senior senior vice vice vice president, president, president, Wells Wells Wells Fargo Fargo Fargo Bank, Bank, Bank, US US US
Reputation Reputation Reputation risk risk risk has has has had had had little little little impact impact impact on on on bank bank bank earnings earnings earnings
The The The less less less charitable charitable charitable felt felt felt that that that little little little had had had changed. changed. changed. The The The reputational reputational reputational damage damage damage that that that the the the banks banks banks have have have suffered suffered suffered seems seems seems to to have to have have had had had relatively relatively relatively little little little impact impact impact onon on their their their behaviour. behaviour. behaviour. AA A banking banking banking consultant consultant consultant said said said that that that it's it's it's hard hard hard to to see to see see that that that this this this state state state of of affairs of affairs affairs has has has done done done much much much to to undermine to undermine undermine their their their profits. profits. profits. Michael Michael Michael Mainelli, Mainelli, Mainelli, executive executive executive chairman chairman chairman of of Z/Yen of Z/Yen Z/Yen Group, Group, Group, said said said that that that banks banks banks have have have lost lost lost public public public support support support but but but don't don't don't seem seem seem to to to have have have noticed. noticed. noticed. AA A combination combination combination of of of a few a a few few disasters disasters disasters requiring requiring requiring more more more bail-outs bail-outs bail-outs could could could lead lead lead to to to complete complete complete nationalisation. nationalisation. nationalisation. An An An Australian Australian Australian banker banker banker also also also addressed addressed addressed the the the more more more specific specific specific concern concern concern about about about the the the evaporation evaporation evaporation of of trust of trust trust in in the in the the banking banking banking markets. markets. markets. The The The fundamental fundamental fundamental concern concern concern for for for me me me is is the is the the restoration restoration restoration of of confidence of confidence confidence that that that financial financial financial institutions institutions institutions have have have in in each in each each other. other. other. Without Without Without this, this, this, I see II see see a a very a very very slow, slow, slow, protracted protracted protracted return return return to to to health health health for for for the the the global global global economy. economy. economy. Some Some Some
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respondents respondents saw saw aa longer longer term term risk risk that that the the banking banking industry industry would would become become complacent complacent behind behind itsits protective protective barriers barriers ofof regulation regulation and and state state guarantees, guarantees, and and that that this this would would delay delay the the recovery recovery ofof public public trust. trust. Also, Also, it it depends depends on on what what you you mean mean by by reputation reputation risk. risk. By By one one definition, definition, the the huge huge increase increase inin regulation regulation and and political political interference interference suffered suffered byby the the banks banks is is aa direct direct consequence consequence ofof the the poor poor reputation reputation they they have have acquired acquired for for themselves. themselves.
26. 26. Commodities Commodities(13) (13)

The The risks risks in in commodities commodities are are seen seen to to bebe slight slight soso far far asas banks banks are are concerned. concerned. Few Few are are large large players players inin these these markets, markets, and and there there are are well-tried well-tried means means ofof hedging hedging price price volatility. volatility. Nonetheless, Nonetheless, commodity commodity price price movements movements are are closely closely linked linked to to the the fortunes fortunes ofof the the macro-economy, macro-economy, and and uncertainty uncertainty about about the the prospects prospects both both for for the the developed developed world world and and the the BRICS BRICS could could produce produce some some unwelcome unwelcome surprises. surprises. One One respondent respondent said: said: Prices Prices can can move move very very fast fast here here fortunately fortunately positions positions are are typically typically small. small. Banks Banks also also have have business business exposure exposure to to companies companies and and dealers dealers who who are are direct direct dealers dealers inin these these markets. markets.
27. 27. Fraud Fraud(15) (15)

Fraud Fraud risk risk is is seen seen to to be be manageable manageable
The The consensus consensus is is that that fraud fraud is is a permanent a permanent but but manageable manageable risk, risk, even even if if it it may may bebe rising rising now now because because ofof the the difficult difficult economic economic climate. climate. The The chief chief executive executive ofof a UK a UK bank bank said: said: Economic Economic hardship hardship usually usually leads leads toto higher higher fraud. fraud. Insider Insider fraud fraud and and account account takeover takeover are are the the two two most most likely likely areas areas ofof exposure. exposure. AA US US banker banker said said that that we we will will continue continue toto have have incidents incidents ofof fraud, fraud, asas financial financial institutions institutions are are combating combating crime crime rings rings that that are are well-organized, well-organized, well-funded, well-funded, disciplined disciplined and and focused. focused. Better Better cooperation cooperation between between the the public public and and private private sectors sectors going going forward forward is is critical critical in in fighting fighting these these crime crime rings. rings. But But the the chance chance ofof a large a large life-threatening life-threatening fraud fraud is is seen seen toto bebe low low and and certainly certainly less less costly costly than than bank bank losses losses resulting resulting from from poor poor decisions decisions at at the the top. top. This This will will always always bebe anan issue, issue, but but will will never never match match losses losses from from credit credit oror bad bad management, management, said said the the chief chief investment investment officer officer at at a large a large UK UK institutional institutional investor. investor. But But the the chief chief financial financial officer officer ofof aa US US bank bank said said that that itit is is still still anan expense expense toto keep keep up up with with security security measures measures toto avoid avoid a loss a loss ofof confidence confidence inin the the market. market.
28. 28. Human Humanresources resources(-) (-)

We We included included a question a question on on human human resources resources for for the the first first time time this this year year because because there there seemed seemed toto bebe rising rising concern concern about about banks banks losing losing talent talent since since the the crisis, crisis, for for aa number number ofof reasons: reasons: bonuses bonuses are are being being cut, cut, bankers bankers are are becoming becoming social social outcasts, outcasts, the the business business is is being being regulated regulated toto death. death. The The position position ofof this this risk risk inin the the rankings rankings speaks speaks for for itself: itself: it it is is not not perceived perceived to to bebe aa large large one. one. People People still still want want to to bebe bankers bankers because because they they see see it it asas anan interesting interesting and and rewarding rewarding career. career. As As one one respondent respondent said: said: Its Its losing losing the the glitz glitz factor, factor, but but its its still still attractive. attractive.
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People People still still want want to to bebe bankers, bankers, despite despite the the crisis crisis
PartPart of the of the reason reason for job for job demand, demand, of course, of course, is that is that banks banks are are downsizing downsizing andand good good banking banking jobs jobs are are scarce. scarce. A respondent A respondent from from oneone of the of the large large Swiss Swiss banks banks saidsaid thatthat in in spite spite of the of the anti-banker anti-banker sentiment, sentiment, numbers numbers applying applying to join to join the the industry industry have have not not declined declined noticeably. noticeably. Also, Also, the the paypay continues continues to be togood. be good. ButBut there there are are worries. worries. A senior A senior UK UK clearing clearing banker banker wrote: wrote: Against Against [the[the economic] economic] backdrop, backdrop, andand continuing continuing vilification vilification of the of the industry industry by media by media andand politicians, politicians, allied allied to ato squeeze a squeeze on remuneration on remuneration (in mainstream (in mainstream financial financial services, services, not not justjust investment investment banking), banking), the the recruitment recruitment andand retention retention of high of high quality quality staff, staff, andand encouragement encouragement of aof a flow flow of young of young talent talent intointo the the industry industry risks risks becoming becoming a systemic a systemic issue. issue. Another Another concern concern is that is that as mainstream as mainstream banking banking becomes becomes more more heavily heavily regulated regulated and and boring, boring, the the creative creative talent talent willwill seek seek better better opportunities opportunities in the in the shadow shadow banking banking sector, sector, which which many many see see as aas bad a bad thing. thing. According According to one to one London-based London-based respondent: respondent: Bankers Bankers are are seen seen as pariahs as pariahs andand the the constant constant andand misguided misguided blame blame attached attached to them to them by the by the realreal culprits culprits (politicians) (politicians) willwill drive drive the the bestbest ones ones intointo greater greater remunerated remunerated areas areas such such as hedge as hedge funds, funds, private private equity equity funds, funds, asset asset management management etc. etc.
29. 29.Reliance Reliance on on third third parties parties (-) (-)

Although Although the the advantages advantages of outsourcing of outsourcing are are much-debated, much-debated, thisthis did did not not emerge emerge as aas a high high riskrisk issue. issue. Most Most respondents respondents thought thought thatthat outsourcing outsourcing waswas worthwhile worthwhile and and generally generally well-managed well-managed by by the the banks, banks, though though recession recession may may make make thatthat more more difficult. difficult. A risk A risk manager manager at one at one of the of the large large Swiss Swiss banks banks saidsaid banks banks were were now now quite quite reliant reliant on third on third parties, parties, but but generally generally governance governance of these of these is well is well policed. policed. If there If there waswas a concern, a concern, it lay it lay in the in the area area of reputation. of reputation. Banks Banks with with distant distant callcall centres centres risked risked alienating alienating their their customers customers and and some some were were already already repatriating repatriating them them for that for that reason. reason. Stefan Stefan Wasilewski, Wasilewski, managing managing partner partner of FinaXiom of FinaXiom Services, Services, saidsaid thatthat outsourcing outsourcing carries carries all of all the of the reputation reputation risks, risks, but but none none of the of the realreal management management control control andand should should only only be be done done with with care, care, andand a central a central banker banker saidsaid thatthat weakening weakening their their linklink to customers to customers is not is not a good a good way way to run to run a sustainable a sustainable business. business. A regulator A regulator warned warned thatthat concentration concentration of risk of risk in India in India for for callcall centre centre andand software software development development has has become become an an issue issue for for banks banks andand service service industries, industries, justjust as as concentration concentration of manufacturing of manufacturing has has occurred occurred in China. in China. Such Such concentrations concentrations typically typically backfire backfire at some at some point point in time. in time.
Outsourcing Outsourcing is is a well a well managed managed risk risk
30. 30. Payment Payment systems systems (29) (29)

Payment Payment systems systems are are the the boring boring partpart of banking, of banking, andand long long may may they they staystay thatthat way. way. This This lowest lowest of banking of banking risks risks has has caused caused little little trouble trouble in recent in recent years, years, andand is not is not expected expected to, though to, though oneone can can never never be sure. be sure. There There is no is reason no reason to think to think payment payment systems systems are are a vector a vector for for spreading spreading instability. instability. They They have have performed performed well well through through the the crisis crisis so far, so far, saidsaid Kathleen Kathleen Tyson Tyson Quah, Quah, managing managing director director of of Absalon Absalon Project, Project, andand a specialist a specialist in in financial financial market market infrastructure. infrastructure. Even Even so, so, respondents respondents hadhad their their worries. worries. OneOne waswas the the impact impact of a of a eurozone eurozone break-up break-up on the on the Single Single Euro Euro Payments Payments Area Area (SEPA), (SEPA), something something for which for which there there waswas no precedent. no precedent. How How would would the the markets markets manage manage if the if the system system hadhad to be toshut be shut down down for several for several days days to allow to allow currency currency realignments realignments to take to take place? place?
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The The financial financial plumbing plumbing has has stood stood up up well well so so far far
Another Another is is the the growing growing concentration concentration ofof business business through through the the centralised centralised counter counter parties parties (CCPs) (CCPs) that that guarantee guarantee trades trades onon derivative derivative exchanges. exchanges. Although Although CCPs CCPs have have also also held held up up well, well, many many respondents respondents saw saw them them asas potential potential weak weak links links inin a stressed a stressed system. system. Dennis Dennis Cox, Cox, CEO CEO ofof Risk Risk Reward Reward Limited, Limited, said said that that the the development development ofof central central counterparties counterparties creates creates a concentration a concentration ofof risk risk which which runs runs exactly exactly counter counter to to everything everything else else that that we we are are hearing hearing the the regulators regulators want want toto achieve achieve and and will will result result inin increased increased unhedged unhedged risk risk and and systemic systemic weakness. weakness. Generally, Generally, counterparty counterparty risk risk is is perceived perceived toto bebe growing growing a natural a natural consequence consequence ofof weakened weakened banks. banks. One One banker banker said said that that the the introduction introduction ofof more more centralised centralised clearing clearing has has simply simply transferred transferred the the risk risk ofof counterparty counterparty loss loss toto a new a new risk risk node. node. I would I would not not bebe surprised surprised toto see see a clearing a clearing house house need need government government support support at at some some stage. stage.
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Banana Skins: The Top Ten since 1996

1996 1 2 3 4 5 6 7 8 9 10 Poor management EMU turbulence Rogue trader Excessive competition Bad lending Emerging markets Fraud Derivatives New products Technology foul-up 2002 1 2 3 4 5 6 7 8 9 10 Credit risk Macro-economy Equity markets Complex financial instruments Business continuation Domestic regulation Insurance Emerging markets Banking market o-capacity International regulation 2006 1 2 3 4 5 6 7 8 9 10 Too much regulation Credit risk Derivatives Commodities Interest rates High dependence on tech. Hedge funds Corporate governance Emerging markets Risk management 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1998 Poor risk management Y2K Poor strategy EMU turbulence Regulation Emerging markets New entrants Cross-border competition Product mis-pricing Grasp of technology 2003 Complex financial instruments Credit risk Macro economy Insurance Business continuation International regulation Equity markets Corporate governance Interest rates Political shocks 2008 Liquidity Credit risk Credit spreads Derivatives Macro-economic trends Risk management Equities Too much regulation Interest rates Hedge funds 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 2000 Equity market crash E-commerce Asset quality Grasp of new technology High dependence on tech. Banking market o-capacity Merger mania Economy overheating Comp. from new entrants Complex fin. instruments 2005 Too much regulation Credit risk Corporate governance Derivatives Hedge funds Fraud Currencies High dependence on tech. Risk management Macro-economic trends 2010 Political interference Credit risk Too much regulation Macro-economic trends Liquidity Capital availability Derivatives Risk management quality Credit spreads Equities
Some Banana Skins come and go, some are hardy perennials. The Top Ten since 1996 show how concerns have changed over 15 years. 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 faded, to be replaced by economic and political risks and particularly by concern over the growth of regulation. The period after 2000 also saw the rise of newfangled risks such as derivatives and hedge funds, the latter making their first appearance in 2005. The 2008 survey, conducted at the height of the financial crisis, brought the focus sharply onto credit and market risks, and propelled two new entrants to the top of the charts: liquidity and credit spreads. The 2010 survey showed a preoccupation with the crash aftermath: lingering debt and funding problems, but also new concerns about the fragility of the world economy and the intrusion of government into the banking sector, many of which have materialised in the present survey.
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C S F I / New York CSFI APPENDIX: The questionnaire
CSFI CSFI
CENTRE FOR THE STUDY OF FINANCIAL INNOVATION CENTRE FOR THE STUDY OF FINANCIAL INNOVATION
5, Derby Street, London W1J 7AB, UK Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190 5, Derby Street, London W1J 7AB, UK Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190
Banking Banana Skins 2011 Banking Banana Skins 2011
Each year we ask senior bankers and close observers of the financial scene to describe their main worries about the banking industry as they look ahead. We'd be very grateful if you would take a few minutes to fill out this form, and return it to us by December 12th Each year we ask senior bankers and close observers of the financial scene to describe their main worries about the CSFI, 5 Derby Street, London W1J 7AB, UK banking industry as they look ahead. We'd be very grateful if you would take a few minutes to fill out this form, and Tel: +44 (0) 20 7493 0173 return it to us by December 12th Fax: +44 (0) 20 7493 0190 Email: info@csfi.org.uk CSFI, 5 Derby Street, London W1J 7AB, UK Tel: +44 (0) 20 7493 0173 Fax: +44 (0) 20 7493 0190 Email: info@csfi.org.uk Position Name Institution Name Institution Country Position Replies are in confidence, but if you are willing to be quoted in our report, please tick Country Replies are in confidence, but if you are willing to be quoted in our report, please tick
Question 1. Please describe your main concerns about the safety of financial institutions (both individual
institutions and the system as a whole) as you look ahead over the next 2-3 years.
Question 1. Please describe your main concerns about the safety of financial institutions (both individual institutions and the system as a whole) as you look ahead over the next 2-3 years.
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QuestionQuestion 2. Here are 2. some Here areas are some of risk areas which of have risk which been attracting have been attention. attracting Please attention. score Please them score on a scale themof on a scale of
5 to 1 where 55 to means 1 where you 5 see means a high yourisk seeto a banks high risk and to1 banks a low and risk.1Use a low the risk. column Use on thethe column right on to add the right comments. to add comments. Add more risks Addat more the bottom risks at if the you bottom wish. if you wish.
Risk
5=high 1=low Back office: Back Howoffice: big a source How big of a risk source are banks' of risk are banks' operations, operations, for examplefor the example complexity the of complexity their of their footprints, their footprints, operating their models, operating or their models, ability or to their ability to introduce new introduce products? new products? Business continuation: Business continuation: How likely is How it that likely is it that inadequate inadequate recovery and recovery resolution and plans resolution will put plans will put banks at risk? banks at risk?
Risk
5=high 1=low
Comment Comment
Capital availability: Capital availability: To what extent To what is theextent is the availability of availability affordable ofcapital affordable a potential capitalsource a potential source of risk to banks? of risk to banks?
Corporate governance: Corporate governance: How likely is How it that likely is it that weakness at weakness board level at will board lead level to will lead to poor oversight poor and oversight control? and control?
Credit risk:Credit How great risk:is How the great risk that is the banks riskwill that banks will suffer losses suffer through losses loan through loan default by sovereign default by borrowers, sovereign companies borrowers, and companies and consumers? consumers? Criminality: How exposed are banks Criminality: How exposed are banks to risk in to risk in areas such as money laundering, evasion and areas such as money laundering, tax evasion tax and theft of confidential information? theft of confidential information?
Derivatives: Derivatives: What is the What potential is the forpotential banks tofor banks to suffer losses suffer through losses their through their dealings in derivatives dealings in and derivatives other exotic and other products? exotic products?
Emerging markets: Emerging How markets: big a source How big a source of risk is potential of risk volatility is potential in emerging volatility in markets? emerging markets?
Fraud: What Fraud: is the What risk ofis banks the risk being of banks defrauded being defrauded by clients orby staff, clients other or than staff,rogue other traders? than rogue traders?
Hedge funds: Hedge Howfunds: strong How a threat strong do hedge a threat funds do hedge funds and other shadow and other banking shadow institutions banking pose institutions to pose to banks, for example banks, for as example competition as competition or sources of or sources of volatility? volatility?
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High dependence on technology: How likely is it that banks could be damaged by internal technology failure?
Human resources: How likely is that banks will have difficulty attracting and retaining talent in the present environment?
Liquidity: What is the risk that banks will encounter liquidity problems?
Macro-economic environment: To what extent does the current macro-economic environment present a threat to the banking sector?
Management incentives: How big a source of risk are incentive structures to banking soundness and reputation?
Markets: How likely is it that banks will lose money because of turbulence in the following key markets: - Equities?
- Currencies?
- Commodities?
- Interest rates?
Payment systems: How likely is a major failure in bank payment systems?
Political interference: How great is the risk that political pressure will damage banks, for example through interference in management and lending policies, or by imposing additional mandates and costs?
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Pricing of risk: How likely are banks to misprice risk due to competitive or other pressures?
Profitability: What is the risk that banks will be unable to maintain adequate profitability in current operating conditions?
Reliance on third parties: To what extent is the outsourcing or off-shoring of activities a potential source of risk to banks?
Quality of risk management: How likely is it that banks will incur losses as a result of inadequate risk management?
Regulation: To what extent could the current wave of regulation have damaging effects on banks?
Restructuring and change management: How likely is it that banks will incur losses as they shed, divide or acquire businesses to meet the new economic and regulatory environment? Rogue trader: How likely are banks to be hit by unauthorised trading?
Sales and business practices: How strong is the risk that banks will incur losses as a result of poor sales, customer servicing and other conduct of business practices? Sustainability: How likely is it that banks will suffer from weaknesses in the area of the environment, ethics, reputation etc.?
Question 3. How well prepared do you think banks are to handle the risks you have identified, where 5 = well and 1 = poorly?
Thank you
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CSFI PUBLICATIONS
104 Banking Banana Skins 2012 February 2012. ISBN 978-0-9570895-1-8 103. Views on Vickers: responses to the ICB report. November 2011. ISBN 978-0-9570895-0-1 102. Evolution and Macro-Prudential Regulation By Charles Taylor. October 2011. ISBN 978-0-9563888-9-6 101. Has independent research come of age? By Vince Heaney. June 2011. ISBN 978-0-9563888-7-2. 100. Insurance Banana Skins 2011: the CSFI survey of the risks facing insurers May 2011. ISBN 978-0-9563888-8-9. 99. Microfinance Banana Skins 2011: the CSFI survey of microfinance risk February 2011. ISBN 978-0-9563888-6-5. 98. Including Africa - Beyond microfinance By Mark Napier. February 2011. ISBN 978-0-9563888-5-8. 97. Getting Brussels right: best practice for City firms in handling EU institutions By Malcolm Levitt. December 2010. ISBN 978-0-9563888-4-1. 96. Private equity, public loss? By Peter Morris. July 2010. ISBN 978-0-9563888-3-4. 95. Systemic policy and financial stability: a framework for delivery. By Sir Andrew Large. June 2010. ISBN 978-0-9563888-2-7. 94. STRUGGLING UP THE LEARNING CURVE: Solvency II and the insurance industry. By Shirley Beglinger. June 2010. ISBN 978-0-9563888-1-0. 93. Investing in Social Enterprise: the role of tax incentives. By Vince Heaney. May 2010. ISBN 978-0-9561904-8-2. 92. banana skins 2010: after the quake. Sponsored by PwC. By David Lascelles. February 2010. ISBN 978-0-9561904-9-9. 91. FIXING REGULATION By Clive Briault. October 2009. ISBN 978-0-9563888-0-3. 90. CREDIT CRUNCH DIARIES: the financial crisis by those who made it happen. By Nick Carn and David Lascelles. October 2009. ISBN 978-0-9561904-5-1. 89. Twin Peaks Revisited: a second chance for regulatory reform. By Michael W. Taylor. September 2009. ISBN 978-0-9561904-7-5. 88. NARROW BANKING: the reform of banking regulation. By John Kay. September 2009. ISBN 978-0-9561904-6-8. 87. THE ROAD TO LONG FINANCE: a systems view of the credit scrunch. By Michael Mainelli and Bob Giffords. July 2009. ISBN 978-0-9561904-4-4. 86. FAIR BANKING: the road to redemption for UK banks. By Antony Elliott. July 2009. ISBN 978-0-9561904-2-0. 85. MICROFINANCE BANANA SKINS 2009: confronting crises and change. By David Lascelles. June 2009. ISBN 978-0-9561904-3-7. 84. GRUMPY OLD BANKERS: wisdom from crises past. March 2009. ISBN 978-0-9561904-0-6. 83. HOW TO STOP THE RECESSION: a leading UK economists thoughts on resolving the current crises. By Tim Congdon. February 2009. ISBN 978-0-9561904-1-3. 82. INSURANCE BANANA SKINS 2009: the CSFI survey of the risks facing insurers. By David Lascelles. February 2009. ISBN 978-0-9551811-9-1. 81. BANKING BANANA SKINS 2008: an industry in turmoil. The CSFIs regular survey of banking risk at a time of industry turmoil. May 2008. ISBN 978-0-9551811-8-4. 80. MICROFINANCE BANANA SKINS 2008: risk in a booming industry. By David Lascelles. March 2008. ISBN 978-0-9551811-7-7. 79. INFORMAL MONEY TRANSFERS: economic links between UK diaspora groups and recipients back home. By David Seddon. November 2007. ISBN 978-0-9551811-5-3. 78. A TOUGH NUT: Basel 2, insurance and the law of unexpected consequences. By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3. 77. WEB 2.0: how the next generation of the Internet is changing financial services. By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6. 76. PRINCIPLES IN PRACTICE: an antidote to regulatory prescription. The report of the CSFI Working Group on Effective Regulation. June 2007. ISBN 978-0-9551811-2-2. 19.95/$29.95/22.95 25/$50/40 25/$50/40 25/$50/40 25/$45/35 19.95/$29.95/22.95 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35 25/$45/35
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75. INSURANCE BANANA SKINS 2007: a survey of the risks facing the insurance industry. Sponsored by PwC. By David Lascelles. May 2007. ISBN 978-0-9551811-3-9. 74. BIG BANG: two decades on. City experts who lived through Big Bang discuss the lasting impact of the de-regulation of Londons securities markets Sponsored by Clifford Chance. February 2007. ISBN 978-0-9551811-1-5. 73. BANKING BANANA SKINS 2006 The latest survey of risks facing the banking industry Sponsored by PwC. By David Lascelles. April 2006. ISBN 0-9551811-0-0. 72. THE PERVERSITY OF INSURANCE ACCOUNTING: in defence of finite re-insurance. An industry insider defends finite re-insurance as a rational response to irrational demands. By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0. 71. SURVIVING THE DOG FOOD YEARS: solutions to the pensions crisis. New thinking in the pensions area (together with a nifty twist by Graham Cox). By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8. 70. NOT WAVING BUT DROWNING: over-indebtedness by misjudgement. A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market. By Antony Elliott. March 2005. ISBN 0-9545208-7-4. 69. BANANA SKINS 2005 Our latest survey of where bankers, regulators and journalists see the next problems coming from. Sponsored by PwC. By David Lascelles. February 2005. ISBN 0-9545208-6-6. 68. BETTING ON THE FUTURE: online gambling goes mainstream financial. By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8 67. REGULATION OF THE NON-LIFE INSURANCE MARKET: why is it so damn difficult? By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X 66. COMPANIES CANNOT DO IT ALONE: an investigation into UK management attitudes to Company Voluntary Arrangements. By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1 65. THE CURSE OF THE CORPORATE STATE: saving capitalism from itself. By Bob Monks. January 2004. ISBN 0-9545208-2-3 64. BANKING BANANA SKINS 2003: what bankers were worrying about in the middle of 2003. Sponsored by PwC. By David Lascelles. September 2003. ISBN 0-9545208-1-5 63. THE GLOBAL FX INDUSTRY: coping with consolidation. Sponsored by Reuters. By Christopher Swann. May 2003. ISBN 0-9545208-0-7 62. PENSIONS IN CRISIS? RESTORING CONFIDENCE: a note on a conference held on February 26, 2003. By Andrew Hilton. May 2003. ISBN 0-954145-7-3 61. BASEL LITE: recommendations for the European implementation of the new Basel accord. By Alistair Milne. April 2003. ISBN 0-954145-8-1 60. THINKING NOT TICKING: bringing competition to the public interest audit. By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5 59. A NEW GENERAL APPROACH TO CAPITAL ADEQUACY: a simple and comprehensive alternative to Basel 2. By Charles Taylor. November 2002. ISBN 0-9543145-5-7 58. WHO SPEAKS FOR THE CITY? trade associations galore. By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9 57. CAPITALISM WITHOUT OWNERS WILL FAIL: a policymakers guide to reform. By Robert Monks and Allen Sykes. November 2002. ISBN 0-9543145-3-0 56. THE FUTURE OF FINANCIAL ADVICE IN A POST-POLARISATION MARKETPLACE. By Stuart Fowler. November 2002. ISBN 0-9543145-2-2 55. CLEARING AND SETTLEMENT: monopoly or market? By Tim Jones. October 2002. ISBN 0-9543145-1-4 54. WAITING FOR ARIADNE: a suggestion for reforming financial services regulation. Kevin James. July 2002. ISBN 0-9543145-0-6 53. HARVESTING TECHNOLOGY: financing technology based SMEs in the UK. Craig Pickering. April 2002. ISBN 0-9543144-5-3 52. SINGLE STOCK FUTURES: the Ultimate Derivative. By David Lascelles. February 2002. ISBN 0-9543144-5-2 51. BANKING BANANA SKINS 2002: a CSFI Survey of Risks Facing Banks. What bankers are worrying about at the beginning of 2002. Sponsored by PwC. By David Lascelles. February, 2002. ISBN 0-9543144-5-1 50. BUMPS ON THE ROAD TO BASEL: an anthology of views on Basel 2. Edited by Andrew Hilton. January 2002. ISBN 0-9543144-5-0
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49. THE SHORT-TERM PRICE EFFECTS OF POPULAR SHARE RECCOMENDATIONS. By Bill McCabe. September 2001. ISBN 0-9543144-4-9 48. WAKING UP TO THE FSA: how the City views its new regulator. By David Lascelles. May 2001. ISBN 0-9543144-4-8 47. BRIDGING THE EQUITY GAP: a new proposal for virtual local equity markets. By Tim Mocroft. January 2001. ISBN 0-9543144-4-7 46. iX: better or just bigger? By Andrew Hilton and David Lascelles. August 2000. ISBN 0-9543144-4-6 45. BANKING BANANA SKINS 2000: the CSFIs latest survey of what UK bankers feel are the biggest challenges facing them. By David Lascelles. June 2000. ISBN 0-9543144-4-5 44. INTERNET BANKING: a fragile flower. By Andrew Hilton. April 2000. ISBN 0-9543144-4-4 43. REINVENTING THE COMMONWEALTH DEVELOPMENT CORPORATION UNDER PUBLIC-PRIVATE PARTNERSHIP. By Sir Michael McWilliam. March 2000. ISBN 0-9543144-4-3 42. IN OR OUT: maximising the benefits/minimising the costs of (temporary or permanent) non-membership of EMU. Various. November 1999. ISBN 0-9543144-4-2 41. "EUROPES NEW BANKS: the non-banks phenomenon. By David Lascelles. November 1999. ISBN 0-9543144-4-1 40. A MARKET COMPARABLE APPROACH TO THE PRICING OF CREDIT DEFAULT SWAPS. By Tim Townend. October 1999. ISBN 0-9543144-4-0 39. QUANT AND MAMMON: meeting the Citys requirements for post-graduate research and skills in financial engineering. By David Lascelles. April 1999. ISBN 0-9543144-3-9 38. PSYCHOLOGY AND THE CITY: applications to trading, dealing and investment analysis. By Denis Hilton. April 1999. ISBN 0-9543144-3-8 37. LE PRIX DE LEUROPE: competition between London, Paris and Frankfurt. By David Lascelles. February 1999. ISBN 0-9543144-3-7 36. THE INTERNET IN TEN YEARS TIME: a CSFI survey. Various. November 1998. ISBN 0-9543144-3-6 35. CYBERCRIME: tracing the evidence. By Rosamund McDougall. September 1998. ISBN 0-9543144-3-5 34. THE ROLE OF MACRO-ECONOMIC POLICY IN STOCK RETURN PREDICTABILITY. By Nandita Manrakhan. August 1998. ISBN 0-9543144-3-4 33. MUTUALITY FOR THE 21ST CENTURY. By Rosalind Gilmore. July 1998. ISBN 0-9543144-3-3 32. BANKING BANANA SKINS The fifth annual survey of possible shock to the system. By David Lascelles. July 1998. ISBN 0-9543144-3-2 31. EMERALD CITY BANK: banking in 2010. Various. March 1998. ISBN 0-9543144-3-1 30. CREDIT WHERE CREDIT IS DUE: bringing microfinance into mainstream. By Peter Montagnon. February 1998. ISBN 0-9543144-3-0 29. THE FALL OF MULHOUSE BRAND. By David Shirreff. December 1997. ISBN 0-9543144-2-9 28. CALL IN THE RED BRACES BRIGADE: the case for electricity derivatives. Ronan Parker and Anthony White. November 1997. ISBN 0-9543144-2-8 27. FOREIGN CURRENCY EXOTIC OPTIONS. A trading simulator for innovative dealers in foreign currency (with disc). By Stavros Pavlou. October 1997. ISBN 0-9543144-2-7 26. BANKING BANANA SKINS:1997. The latest survey showing how bankers might slip up over the next two to three years. By David Lascelles. April 1997. ISBN 0-9543144-2-6 25. THE CRASH OF 2003: an EMU fairy tale. By David Lascelles. December 1996. ISBN 0-9543144-2-5 24. CENTRAL BANK INTERVENTION: a new approach. New techniques for managing exchange rates. By Neil Record. November 1996. ISBN 0-9543144-2-4 23. PEAK PRACTICE: how to reform the UKs regulatory system. By Michael Taylor. October 1996. ISBN 0-9543144-2-3 22. WELFARE:A RADICAL RETHINK: the Personal Welfare Plan. Andrew Dobson. May 1996. ISBN 0-9543144-2-2 21. BANKING BANANA SKINS III By David Lascelles. March 1996. ISBN 0-9543144-2-1 20. TWIN PEAKS: a regulatory structure for the new century. Michael Taylor. December 1995. ISBN 0-9543144-2-0
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19. OPTIONS AND CURRENCY INTERVENTION. A radical proposal on the use of currency option strategies for central banks. Charles Taylor. October 1995. ISBN 0-9543144-1-9 18. THE UK BUILDING SOCIETIES: do they have a future? A collection of essays by Angela Knight; Alistair Darling, Peter White, Peter Birch, Bert Ely and Karel Lannoo September 1995. ISBN 0-9543144-1-8 17. THE CITY UNDER THREAT. A leading French journalist worries about complacency in the City of London. By Patrick de Jacquelot. August 1995. ISBN 0-9543144-1-7 16. BRINGING MARKET-DRIVEN REGULATION TO EUROPEAN BANKING: a proposal for 100 per cent cross-guarantees. By Bert Ely. July 1995. ISBN 0-9543144-1-6 15. ECONOMIC AND MONETARY UNION STAGE III: the issues for banks. By Malcolm Levitt. May 1995. ISBN 0-9543144-1-5 14. AN ENVIRONMENTAL RISK RATING FOR SCOTTISH NUCLEAR. Various. March 1995. ISBN 0-9543144-1-4 13. BANKS AS PROVIDERS OF INFORMATION SECURITY SERVICES. By Nick Collin. February 1995. ISBN 0-9543144-1-3 12. LIQUIDITY RATINGS FOR BONDS. By Ian Mackintosh. January 1995. ISBN 0-9543144-1-2 11. IBM/CSFI PRIZE: technology and financial services. Simon Moorhead and Graeme Faulds. December 1994. ISBN 0-9543144-1-1 10. BANKING BANANA SKINS Il Lessons for the future from the last banking crisis. Sir Kit McMahon, Sir Nicholas Goodison, Bruce Pattullo, John Melbourn and Philippa Foster-Back. November 1994. ISBN 0-9543144-1-0 9. 8. 7. THE EURO-ARAB DILEMMA: harnessing public and private capital to generate jobs and growth in the Arab world. By Jacques Roger-Machart. October 1994. ISBN 0-9543144-0-9 A NEW APPROACH TO SETTING CAPITAL REQUIREMENTS FOR BANKS. Charles Taylor. July 1994. ISBN 0-9543144-0-8 BANKING BANANA SKINS The first in a periodic series of papers looking at where the next financial crisis is likely to spring from. By Martin Mayer, John Plender, Brooke Unger, Robin Monro-Davies and Keith Brown. June 1994. ISBN 0-9543144-0-7 UK FINANCIAL REGULATION: a blueprint for change. Andrew Hilton (prepared pseudononymously by a senior commercial banker). May 1994. ISBN 0-9543144-0-6 THE IBM DOLLAR. A proposal for the wider use of target currencies. By Edward de Bono. March 1994. ISBN 0-9543144-0-5 ELECTRONIC SHARE DEALING FOR THE PRIVATE INVESTOR. By Paul Laird. January 1994. ISBN 0-9543144-0-4 RATING ENVIRONMENTAL RISK. By David Lascelles. December 1993. ISBN 0-9543144-0-3 DERIVATIVES FOR THE RETAIL CLIENT. By Andrew Dobson. November 1993. ISBN 0-9543144-0-2 FINANCING THE RUSSIAN SAFETY NET. Peter Ackerman and Edward Balls. September 1993. ISBN 0-9543144-0-1
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Regulation papers
4. 3. 2. 1. EMBRACING SMOKE: the Internet and financial services regulation. By Joanna Benjamin and Deborah Sabalot. June 1999 INDEPENDENCE AND ACCOUNTABILITY: tweaking the Financial Services Authority. By Robert Laslett and Michael Taylor. June 1998. FINANCIAL EDUCATION AND THE ROLE OF THE REGULATOR: the limits of caveat emptor. By Victoria Nye. May 1998 ACCEPTING FAILURE. By David Lascelles. February 1998 6/$10 6/$10 6/$10 6/$10
Other Reports
THE NEW WORLD OF EUROPEAN E-FINANCE. Various. December 2002. ISBN 0-9543145-9-X The Internet and Financial Services: a CSFI report. June 1997. (Available from City and Financial. To order a copy, tel: 01483 720 707; fax: 01483 740 603) 40/$65/65 45
Sponsorship
The CSFI receives general support from many public and private institutions, and that support takes different forms. The Centre currently receives financial support from; inter alia:
Ruffer Citigroup Ernst & Young Fitch Ratings Aberdeen Asset Management ABI ACCA Accenture Arbuthnot Aviva Bank of England Chartered Insurance Institute City of London Deloitte Eversheds Fidelity International Finance & Leasing Association FOA FRC FSA Gatehouse Bank ICMA JP Morgan PwC HSBC Jersey Finance KPMG LCH.Clearnet Lloyds Banking Group Logica Man Group plc Morgan Stanley Nomura Institute PA Consulting Royal Bank of Scotland Santander The Law Debenture Corporation Thomson Reuters TPG Design UK Payments (APACS) Z/Yen Zurich Kreab Gavin Anderson LandesBank Berlin Lansons Communications LEBA and WMBA Lending Standards Board Lombard Street Research MacDougall Auctions Miller Insurance Services Nabarro NM Rothschild Record Currency Management RegulEyes Risk Reward Skadden, Arps SWIFT Taiwan FSC The Share Centre THFC WDX Organisation
Absolute Strategy ACT AFME Alpheus Solutions Bank of Italy Bank of Japan BCM International Regulatory Analytics LLC Brigade Electronics BVCA Chown Dewhurst CISI FairBanking Foundation FinaXiom Greentarget HM Treasury Hume Brophy Intrinsic Value Investors Investment Management Association
The CSFI also receives support in kind from, inter alia: - - - - - - - Clifford Chance Edwin Coe Financial Times GISE AG ifs School of Finance Linklaters LLP Hogan Lovells - - - - - - - NERC NESTA Promontory SJ Berwin Standard Chartered Taylor Wessing Macquarie Group
The Centre has received special purpose funding from: - CGAP and Citi (for Microfinance Banana Skins); - PwC (for Banking Banana Skins and Insurance Banana Skins); and - Euro IRP (for Has independent research come of age?) In addition, it has set up the following fellowship programmes: - the DTCC/CSFI fellowship in Post-Trade Architecture; - the VISA/CSFI fellowship in Identity in Financial Services; and - the DfID/Citi/CSFI fellowship in Development.
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UK 25 US $45 35 CSFI
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Banking Banana Skins 2012

The system in peril

Centre for the Study of Financial Innovation

The CSFI survey of bank risk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

C S F I / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

C S F I / New York CSFI

About this survey

The responses by country were as follows:

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

5 Political interference (1)(1) 5 Political interference

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

Big Big movers movers

FALLING FALLING RISKS RISKS

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

The The risks risks are are global global

Banana Skins Index

Credit risk Derivatives

Liquidity Too much regulation

Top risk Avg.of all risks

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

Who Who said said what what

Macro-economic 1 Macro-economic risk risk

Credit 1 Credit risk risk

Regulators Regulators supervisors, supervisors, government government officials officials

Macro-economic 1 Macro-economic risk risk

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

Banking Banking Banana Banana Skins Skins 2012 2012

C S F I / New York CSFI

Macro-economic 1 Macro-economic risk risk

Macro-economic 1 Macro-economic risk risk

Asia Asia Pacific Pacific

Macro-economic 1 Macro-economic risk risk

Banking Banking Banana Banana Skins Skins 2012 2012

C S F I / New York CSFI

Macro-economic 1 Macro-economic risk risk

Emerging Emerging economies economies

Macro-economic 1 Macro-economic risk risk

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

1.1.Macro-economic Macro-economic risk risk (4) (4)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

2. 2. Credit Credit risk risk (2) (2)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

3.3.Liquidity Liquidity (5) (5)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

4.4. Capital Capital availability availability (6) (6)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

5. 5. Political Politicalinterference interference(1) (1)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

The The culture culture of of blame blame

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

C S F I / New York CSFI Banking BankingBanana BananaSkins Skins2012 2012

7. 7. Profitability Profitability(-) (-)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

8. 8. Derivatives Derivatives (7) (7)

Derivatives Derivatives risk risk may may be be easing easing offoff

9. 9. Corporate Corporate governance governance (12) (12)

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org