‘Regulatory overkill’ tops list of banking risks

The rise in regulation has become the greatest risk facing the banking sector according to the latest ‘Banana Skins’ survey conducted by the CSFI, the independent City of London think tank, and sponsored by PricewaterhouseCoopers. The report finds that regulatory overkill ‘saps bank resources’, ‘reduces risk diversification’ and ‘creates a false sense of security’.

This finding is based on responses from 440 bankers and close observers of the banking scene in 54 countries, but the threat is perceived to be particularly strong in the EU and North America . Many senior bankers described regulation as ‘out of control’.

The Banana Skins survey, now in its 10th year, ranks banking risks by their perceived severity, and analyses their potential impact on the industry.

John Hitchins, UK banking leader, PricewaterhouseCoopers, commented: "Bankers have thrown down a challenge against too much prescriptive regulation. Many are worried that it is beginning to stifle innovation and judgement across the industry. While few challenge the objectives of regulators, there is a clear need for further debate on how these are implemented".

Business continuity worries have slipped down the list of concerns, down from 5th last year to 19th this year, possibly indicating increased complacency in this area, especially since the survey found that banks were seen to be less well prepared to handle risk than previously. 57 percent of respondents thought banks were moderately well prepared or better to handle the risks, down from 69 percent in 2004. One reason was the inclusion in this survey of a larger proportion of respondents from emerging market and EU accession countries where bank readiness was seen to be less advanced than in industrial nations. In the advanced banking markets, the considerable risk control work of recent years is considered to be paying off in higher awareness and better systems, though this is offset by fears that banks may be becoming too process-driven.

Full ranking information for Banana Skins 2005. 2004 rankings are in brackets:

1 Too much regulation (6)

2 Credit risk (2)

3 Corporate governance (8)

4 Derivatives (1)

5 Hedge funds (15)

6 Fraud (11)

7 Currencies (18)

8 High dependence on technology (12)

9 Risk management techniques (16)

10 Macro-economic trends (3)

11 Insurance sector problems (4)

12 Interest rates (9)

13 Money laundering (14)

14 Commodities (26)

15 Emerging markets (22)

16 Grasp of new technology (19)

17 Legal risk (-)

18 Equities (7)

19 Business continuity (5)

20 Banking market overcapacity (17)

21 Management incentives (20)

22 Political shocks (10)

23 Retail sales practices (21)

24 Rogue trader (23)

25 Payment systems (25)

26 Back office (24)

27 Merger mania (27)

28 Environmental risk (30)

29 Competition from new entrants (28)

•Date: 1st March 2005 • Region: Various •Type: Article •Topic: Financial sector
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