The greatest challenge now facing the banking industry is not financial but political, according to the latest 'Banking Banana Skins' survey conducted by the CSFI in association with PricewaterhouseCoopers.
The annual poll of the banking sector puts 'political interference' at the top of a list of the 30 most-serious challenges to banks during this period of financial crisis. The poll is based on responses from 450 senior figures from the financial world in 49 countries.
Respondents, who include practising bankers as well as close observers of the financial scene and regulators, said that the 'politicisation' of banks as a result of bail-outs and takeovers posed a major threat to their financial health.
This view is shared by all types of respondents in all the major banking regions, though for different reasons. Bankers saw politics distorting their lending decisions. Non-bankers said that political rescues had damaged banks by encouraging reckless attitudes. Regulators worried that governments would withdraw their support from banks before they had time to rebuild their financial strength, precipitating another collapse.
'Political interference' has never appeared as a risk in 15 years of 'Banana Skins' surveys. The top risk is closely linked to the number three risk, 'too much regulation', and the concern that banks will be further damaged by over-reaction to the crisis.
David Lascelles, survey editor, said: "It is ironic that politics should emerge as a risk when it was them that rescued the banks in the first place. But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap."
Josy Steenwinckel, financial services leader of PricewaterhouseCoopers in Belgium, confirms this: "A worrying theme is the question of whether the financial crisis has taken the banking industry’s future out of its own hands. With political interference and too much regulation as the greatest challenges, there is clear sense that change may be forced onto the industry from outside.
"This year's survey is a well-timed warning that the cumulative effect of current regulatory initiatives may have unintended consequences. The need to rebuild trust between banks and regulators is therefore more acute than ever."
Many of the challenges ranked high by the survey — notably credit risk at number two — stem from concern about the effects of the recession on the banking industry. The bulk of respondents were gloomy about the outlook, fearing a 'double dip' recession with a further wave of bad debts hitting the banks. The mood is particularly dark in the Asia-Pacific region where respondents are worried that a new asset bubble may burst, bringing about a collapse of confidence in the credit markets.
The poll also reflects concern about the banks' ability to manage themselves safely. The quality of risk management, corporate governance and management incentives all feature prominently as potential sources of risk.
The survey also reveals, however, that some risks are easing as the world pulls out of the crisis. A number of financial risks — liquidity, derivatives, credit spreads and equities — are down on the previous poll in 2008. A striking fall is the risk from hedge funds, down from number ten to number 19, as their threat is seen to diminish. 'Financial plumbing' risks are also seen to be low: back office, payments systems, etc. all performed well in the crisis. Environmental risk is at an unchanged number 25 despite the heat generated by the Copenhagen Summit.
