Political interference tops banking risks

1 February 2010

The greatest threat facing the international banking industry is not financial - it's political, according to a global survey by PricewaterhouseCoopers and the Centre for the Study of Financial Information. For the first time in the 15 year history of 'Banking Banana Skins', political interference was rated the number one risk to banks internationally.

Credit risk and too much regulation rounded out the top three concerns among the survey respondents - 443 bankers, observers and regulators.

All three types of respondents shared the view that the 'politicisation' of banks posed a major threat, but for different reasons. Bankers feel politics could distort their lending decisions. Non-bankers believe that bank rescues have created a 'moral hazard' - that is, an expectation by banks that they will always be bailed out - and would encourage reckless attitudes. Regulators are worried that an early withdrawal of government support before banks are stabilised could trigger another global financial collapse.

Mike Codling, PricewaterhouseCoopers Banking Leader said, "It's ironic that politics should emerge as a risk to banking when in fact many banks had to be rescued courtesy of politicians and public funds. But clearly the relationship between banks and the wider community has been severely weakened, particularly in the US and Europe."

"Rebuilding trust is going to take years," said Mr Codling "and the risk is that until it is, banks will operate under financial handicaps."

"Indeed, just last week we saw Barack Obama backing plans to restrict banks' activities, and Gordon Brown and Nicolas Sarkozy calling for a tax on bonuses and predicting further tough measures to ensure that in the future, taxpayers won't have to pay for the risks taken by banks."

Knee-jerk reaction concerns

Hand in glove with 'political intervention' is a fear of excessive regulatory intervention (No.3) in the wake of the crisis. Respondents are concerned that the new wave of regulation being proposed could potentially weaken rather than strengthen the banks and the wider economy.

"This year's survey is a well timed reminder that the cumulative effect of current regulatory initiatives may have unintended consequences. Regaining the confidence of the regulators is critical if bankers want to control their own destiny."

In Australia, too much regulation was actually the highest ranked risk. This is consistent with concerns recently expressed by leading Australian bankers that new regulations, such as the proposed new liquidity rules, would stifle the economic recovery.

"While Australia's banking system has remained relatively resilient, we're no doubt going to see higher capital ratios and liquidity levels. These days we're a strong member of the international regulatory community, which is a good thing generally. But our banks didn't suffer like many of those in the US and Europe and our regulators need to be careful not to apply a 'one size fits all' approach."

Project risk the hidden enemy

Mr Codling said, "It is strange that project risk doesn't feature at all among the responses. To a degree it's understandable given the range of challenges bankers have had to deal with. But looking ahead, it could be a hidden enemy."

A gathering of Chief Risk Officers agreed that in the years leading up to the GFC, Australian banks had lost more money due to project risk that from all other categories of risk put together.

"Project risk has to be high up in the minds of Australian bankers right now. Given the majors all have existing integration projects, and large-scale technology improvement plans, the ability to execute and manage project risk is a critical success factor and a route to differentiation."

Macro-economic fears

The fragile state of the global economy (No. 4) combined with the risk of severe credit losses (No.2) has raised fears of not only a 'double-dip' recession but that bankers will be unprepared to respond. Survey respondents agree the current global economic recovery is weak, sustained only by low interest rates and massive fiscal and monetary support.

Many respondents felt that government actions to pump liquidity into the markets had merely inflated an 'asset bubble' which would eventually burst with damaging consequences, as it did in 2007.

Mr Codling said "Global markets have rallied strongly, but great uncertainty still exists. While improving conditions are a cause for optimism, have they created a false sense of security?"

Underlying complacency

Complacency may be the biggest Banana Skin of all. Many respondents were alarmed by the 'business as usual' attitude of banks despite the huge amount of work still needed globally to clear up the mess and stabilise economies.

Mr Codling said, "Clearly many politicians hold the view that behaviours haven't changed and short-term habits will return."

"From a banker's perspective, they don't want to waste a good crisis. Part of that is demonstrating that they've genuinely learnt from their mistakes."

Local Banana Skins

According to the survey, the top 10 Banana Skins identified by Australian respondents were:
  1. Too much regulation
  2. Political interference
  3. Macro-economic trends
  4. Equities
  5. Credit risk
  6. Derivatives
  7. Liquidity
  8. High dependence on technology
  9. Environmental risk
  10. Credit spreads

Global Banana Skins

According to the survey, the top 10 Banana Skins identified by respondents globally were:
  1. Political interference
  2. Credit risk
  3. Too much regulation
  4. Macro-economic trends
  5. Liquidity
  6. Capital availability
  7. Derivatives
  8. Risk management quality
  9. Credit spreads
  10. Equities

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