Regulatory overkill is identified as the greatest risk facing the financial sector for the second year running by the CSFI’s Banking Banana Skins survey of banking risks, in association with PricewaterhouseCoopers LLP.

Respondents from 60 countries said that too much regulation was endangering the financial health of banks with its cost burden and distractions, as they did in the 2005 survey. But this time, many of them added their concern about growing political interference by governments seeking to influence banks’ behaviour and obstruct free markets. The survey result suggests that efforts by governments and regulators to ease the regulatory burden have yet to bear fruit.

John Hitchins, UK Banking Leader at PricewaterhouseCoopers LLP, said: “The financial sector is again throwing down a challenge to the regulators as to whether they have the right balance of cost and benefit.”

As in previous years, concerns about credit risk, derivatives and hedge funds featured high in the table.

Another area of rising concern is the banks’ growing dependence on technology for the ‘safety and soundness of their business’. With the growing sophistication of hackers and the vulnerability of distributed systems to attack, there are questions about the ability of banks to manage their increasingly high-tech operations.

But against that, some previously high-ranking Banana Skins have eased. In the area of financial crime, both fraud and money laundering fell several places, mainly because of the number of initiatives now in place to deal with these issues.

Banks are also seen to be better placed to handle ‘shocks in the system’. This year, 64 percent of respondents thought institutions were moderately well prepared or better able to handle risks, up from 57 percent last year. Confidence was particularly strong among bankers (73 percent), but also among regulators (63 percent), up sharply from 39 percent last time. Outsiders were more sceptical: only 44 percent thought banks were well prepared.

Banking Banana Skins 2006 (2005 position in brackets):
1. Too much regulation (1)
2. Credit risk (2)
3. Derivatives (4)
4. Commodities (14)
5. Interest rates (12)
6. High dependence on technology (8)
7. Hedge funds (5)
8. Corporate governance (3)
9. Emerging markets (15)
10. Risk management techniques (9)
11. Fraud (6)
12. Equities (18)
13. Currencies (7)
14. Macro-economic trends (10)
15. Political shocks (22)
16. Conflicts of interest (-)
17. Banking market overcapacity (20)
18. Money laundering (13)
19. Merger mania (27)
20. Legal risk (17)
21. Business continuation (19)
22. Retail sales practices (23)
23. Insurance sector problems (11)
24. Back office (26)
25. Environmental risk (28)
26. Management incentives (21)
27. Rogue trader (24)
28. Competition from new entrants (29)
29. Payment systems (25)
30. Too little regulation (30)

Copies of the report can be purchased from the CSFI on +44 (0) 20 7493 0173 or from CSFI’s online store at http://www.bookstore.csfi.org.uk

•Date: 29th June 2006• Region: UK/World •Type: Article •Topic: Financial sector
Rate this article or make a comment - click here