Regulatory ‘overkill’ could damage banks and hold back recovery

View this page in: English, Français, Nederlands

Brussels, 23 May 2014

‘Banana Skins’ poll identifies top threats to global and Belgian banks

The heavy volume of new banking regulation since the global financial crisis and the accompanying political backlash against banks could damage the banking industry and hold back the global economic recovery, according to a new banking risk survey, also including Belgian response.

The CSFI’s biennial Banking Banana Skins survey, produced in association with PwC, puts regulation and political interference at the top of the list of 28 possible risks to banks. The poll is based on responses from more than 650 bankers, banking regulators and close observers of the banking industry in 59 countries. There were 14 responses from Belgium.

Overkill from regulators and politicians

The Belgian response reflects global concerns about “overkill” from regulators and politicians, with several respondents highlighting the difficulty of meeting stringent capital requirements (see also appendix 1). One observer of the industry warned of “too much regulation that hampers bank lending to the economy, meaning that banks are replaced by other institutions as financial intermediaries”. The risks around shadow banking ranked much higher in Belgium than they did worldwide.

However, the survey also shows that global anxiety about the outlook for banks has started to decline for the first time in seven years, suggesting that the operating climate for banks is finally turning.

The poll shows that global concerns expressed in earlier surveys about capital availability, liquidity, credit quality and exotic products in the banking system have begun to ease. Although confidence about the macro-economic outlook has also strengthened, the survey reveals strong ongoing concern about the stability of the Eurozone, and rising worries about emerging markets, particularly China where the banking system is seen to be under stress. The outlook for the tapering of quantitative easing by central banks is widely seen as crucial to global economic prospects.

Technology concerns on the rise

A fast-rising risk in the Banana Skins ranking is technology risk, which has globally risen from No. 18 to No. 4, largely on the back of strengthening concern about cybercrime. Though technology risk ranked relatively low down the list in Belgium, this was not reflected in many of the comments we received: in particular there was urgent concern about the problem of legacy systems in the back office and banks’ growing vulnerability to cyber-crime. Belgium was the only jurisdiction in Europe in which human resources risk was ranked among the top few, with one executive in industry expressing concerns about “the ability of financial institutions to attract talent with the right mind-set and values” (see also appendix 2).

A breakdown of global responses shows that all major respondent types (bankers, observers and risk managers) are strongly concerned about regulatory excess and political interference, as well as the state of the global economy. However non-bankers are more worried about institutional risks in banks such as the quality of governance and management; bankers play these risks down.

Regional and local results

By region, the responses show concern about regulation and politics to be strongest in Europe and North America. The top concerns in the Asia Pacific region focus more on the macro-economy and the risk of sharp changes in interest rates.

The most marked differences between Belgium and the rest of the world included:

Higher concerns:

  • Capital availability. Capital requirements in the eurozone in danger of getting out of hand.
  • Back office. In particular, a lack of investment. There is a “significant risk linked to the cost of adaptation to evolving customer needs, regulation, technological evolutions”, the chief risk officer of a bank said.
  • Human resources. The ability of banks to attract top talent in light of the battering the sector’s reputation has taken.
  • Shadow banking. Growing exposure to systemic risks posed by shadow banks, as well as increased competition – though the latter is not necessarily a bad thing.

Lower concerns

  • Corporate governance. Improved by regulations and increased transparency after the crisis.
  • Technology risk. “Risk is low but losses could be high”, according to one banker.

In Luxemburg, smaller players in particular were seen as at risk. Profitability of Luxemburg banks in general is a high concern.

The Swiss response was also dominated by a strong concern about the profitability prospects for banks because of economic uncertainties, particularly over interest rates, and the more hostile operating environment.

In the Netherlands, a major concern is capital availability. "Basel III requires banks to hold stronger buffers, but the availability of capital is very scarce. This would mean that banks will be even more cautious to lend".

In the UK, corporate governance remains an issue. One non-bank respondent said: " I believe the sector has failed to learn lessons from the crisis of 2008 and importantly has not made sufficient changes to the culture and behaviors in the boardroom to ward off further crises in the future".

Appendix 1

Banking Banana Skins 2014  
World Belgium  
1 Regulation  1 Regulation  
2 Political interference  2 Political interference  
3 Macro-economic environment  3 Capital availability  
4 Technology risk  4 Back office  
5 Profitability  5 Human resources  
6 Pricing of risk  6 Profitability  
7 Credit risk  7 Shadow banking  
8 Corporate governance  8 Criminality  
9 Criminality  9 Macro-economic environment  
10 Capital availability  10 Emerging markets  
11 Quality of risk management  11 Social media  
12 Interest rate markets  12 Derivatives  
13 Back office  13 Change management  
14 Change management  14 Liquidity  
15 Liquidity  15 Sales and business practices  
16 Sales and business practices  16 Pricing of risk  
17 Emerging markets  17 Quality of risk management  
18 Derivatives  18 Technology risk  
19 Social media  19 Credit risk  
20 Shadow banking  20 Social sustainability  
21 Management incentives  21 Corporate governance  
22 Currency  22 Interest rate markets  
23 Human resources  23 Management incentives  
24 Reliance on third parties  24 Equity markets  
25 Social sustainability  25 Currency markets  
26 Equity markets  26 Commodity markets  
27 Commodity markets  27 Reliance on third parties  
28 Business continuation  28 Business continuation  

Appendix 2

Anxiety index   Preparedness index  
1 Malaysia 3.66   1 Canada 3.52  
2 Turkey 3.28   2 Australia 3.50  
3 Singapore 3.25   3 Poland 3.50  
4 Romania 3.23   4 China 3.50  
5 USA 3.21   5 Singapore 3.43  
6 Belgium 3.21   6 South Africa 3.31  
7 UK 3.20   7 Philippines 3.25  
8 Netherlands 3.17   8 Latvia 3.23  
9 Mexico 3.14   9 Malaysia 3.20  
10 Global average 3.12   10 Switzerland 3.18  
11 Luxembourg 3.10   11 Turkey 3.17  
12 Canada 3.08   12 India 3.11  
13 Switzerland 3.05   13 Mexico 3.08  
14 South Africa 3.03   14 Global average 3.04  
15 Australia 3.02   15 Romania 3.00  
16 Slovakia 3.00   16 Netherlands 3.00  
17 Philippines 2.99   17 Slovakia 3.00  
18 India 2.97   18 Belgium 2.93  
19 Russia 2.96   19 Luxembourg 2.81  
20 Poland 2.88   20 Russia 2.81  
21 Latvia 2.85   21 UK 2.70  
22 China 2.19   22 USA 2.48  
This index shows the level of "anxiety" conveyed by the scores given to individual risks. The table shows the ranking on a scale of 1-5 where 1=low anxiety and 5=high anxiety. The ranking consists of countries which provided ten or more responses. There is no clear pattern to the result since individual country scores depend very much on local conditions. It is notable, however, that China, a country whose banking system is causing much concern abroad, has the lowest anxiety level. This index shows how well prepared respondents thought banks were to deal with the risks they had identified on a scale of 1-5 where 1=poorly and 5=well. The table shows the ranking for countries which produced ten or more responses. Interestingly, the two countries at the top, Canada and Australia, are the two most widely thought to have weathered the financial crisis reasonably well. By contrast, the two countries at the bottom, the UK and the US, were particularly hard hit.