Recession puts banking industry at risk

The ‘relapse of recession,’ orchestrated by the fragility of the world economy places the banking industry at risk, according to a global survey.

Anxiety levels in the financial system are unprecedentedly high, it said.

UK based Centre for Study of Financial Innovation conducted the Survey in association with PricewaterhouseCoopers, with 700 respondents in 58 countries including New Zealand.

The Survey, known as ‘Banking Banana Skins 2012,’ carries views of banking institutions, regulators and experts obtained towards the end of last year.

PwC Financial Services Partner Sam Shuttleworth said the Survey contained the ‘bleakest response’ of respondents since its launch.

He said it highlighted the ‘huge uncertainty’ in the short-term and the need for changes to restore stability and growth in the long-term.

Serious concerns

The Survey found 22 New Zealand respondents echoing the views of their global counterparts, placing credit risk, liquidity and availability of capital as serious concerns.

“Interestingly, fragility of the economy was third on the list of New Zealand concerns, behind credit and liquidity risk. Political interference and capital availability completed the top-five local concerns,” Mr Shuttleworth said.

According to him, New Zealand respondents had ‘heightened concerns’ over the global banking market. However, they said, ‘Better prepared’ replying to a question, “How well prepared do you think banks are to handle the risks?”

“Given our experiences during the global financial crisis, the New Zealand responses were dominated by concern about the sovereign debt crisis, particularly in the Euro Zone and its potentially depressing impact on us and the global economy,” Mr Shuttleworth said.

Gloomy picture

He said there was a high sense of vulnerability to conditions on international markets and funding singled out if liquidity and access to capital become more difficult.

“This view was shared by global respondents with the results of the global survey highlighting the impact of the Euro Zone crisis and the mounting debt problems in many economies are front of mind for the global banking industry with flow-on consequences being the availability of liquidity and capital.

“This certainly paints a gloomy picture of challenging times ahead,” he said.

Political interference, which was the greatest concern in the Banana Skins 2010 Survey, was placed fifth globally and fourth in New Zealand.

Political interference

Mr Shuttleworth said that the actions of many governments in 2010 to rescue their banks from financial disarray may have restored the system, but it left the global banking industry deeply politicised.

“Political interference is no longer considered such a concern by overseas banks because it is a reality through providing financial support, stricter regulations and exerting pressure on banks’ business decisions,” he said.

The Survey found credit risk as the second biggest global concern but the concern has switched from real estate, commercial and consumer credit to sovereign debt in both the industrialised world and emerging countries.

The Survey has also warned of the concern over a re-run of the 2008 financial crisis, notably in the Euro Zone, with the potential for banks’ funding markets seizing up again.

While fears of a liquidity crunch are widespread, many global respondents said they were in a good liquidity position.

“In contrast, the Australian response was particularly striking for its emphasis on regulatory and political risk. Australian respondents stated regulation and interference were loading costs on banks and stifling the availability of credit,” Mr Shuttleworth said.

New Zealand banks have adopted new regulations such as liquidity measures ahead of Australia, and hence there is less concern over regulation.


Sam Shuttleworth

Banking Banana Skins 2012

New Zealand

Australia

World

1.

Credit risk

1.

Regulation

1.

Macro-economic risk

2.

Liquidity

2.

Macro-economic risk

2.

Credit risk

3.

Macro-economic risk

3.

Political interference

3.

Liquidity

4.

Political interference

4.

Credit risk

4.

Capital availability

5.

Capital availability

5.

High dep. on technology

5.

Political interference

6.

Derivatives

6.

Liquidity

6.

Regulation

7.

Regulation

7.

Capital availability

7.

Profitability

8.

Profitability

8.

Profitability

8.

Derivatives

9.

Pricing of risk

9.

Pricing of risk

9.

Corporate governance

10.

Business continuation

10.

Derivatives

10.

Quality of risk management

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