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Banking

Banana Skins
2010 After the
‘quake

The CSFI
survey of
bank risk
In
In association
association with
with CSFI
Centre for the Study of
Financial Innovation
C S F I / New York CSFI

The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993
to look at future developments in the international financial field – particularly from the point of
view of practitioners. Its goals include identifying new areas of business, flagging areas of danger
and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a
belief in open and efficient markets.
Trustees Governing Council
Minos Zombanakis (Chairman) Sir Brian Pearse (Chairman)
David Lascelles Sir David Bell
Sir David Bell Geoffrey Bell
Robin Monro-Davies Robert Bench
Sir Brian Pearse Rudi Bogni
Peter Cooke
Staff Bill Dalton
Director – Andrew Hilton Sir David Davies
Co-Director – Jane Fuller Prof Charles Goodhart
Senior Fellow – David Lascelles John Heimann
Programme Coordinator – Lisa Moyle John Hitchins
Rene Karsenti
Henry Kaufman
Angela Knight
Sir Andrew Large
David Lascelles
Philip Martin-Brown
Robin Monro-Davies
Rick Murray
John Plender
David Potter
Mark Robson
David Rule
Sir Brian Williamson
Peter Wilson-Smith
Minos Zombanakis

CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or


by calling the Centre on +44 (0) 207 493 0173

Published by
Centre for the Study of Financial Innovation (CSFI)

Email: info@csfi.org.uk
Web: www.csfi.org.uk

ISBN: 978-0-9561904-9-9

Printed in the United Kingdom by Heron, Dawson & Sawyer

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CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk
C S F I / New York CSFI
C S F I / New York CSFI
NUMBER NINETY TWO FEBRUARY 2010

Preface
Preface
The CSFI has been producing its Banking Banana Skins survey almost annually since 1994,
latterly with generous support from PricewaterhouseCoopers.
The CSFI has been producing its Banking Banana Skins survey almost annually since 1994,
The intention
latterly has always
with generous been
support fromto PricewaterhouseCoopers.
identify those concerns that people in the financial services
sector – as well as those who watch, regulate and succour them – believe are the next “banana
skins” on whichhas
The intention thealways
industry is likely
been to slip. those
to identify Note, concerns
therefore, that
that people
it is notin predictive. It is not
the financial what
services
the CSFI – or the author, David Lascelles – believes is going to happen.
sector – as well as those who watch, regulate and succour them – believe are the next “banana It is a distillation of what
others
skins” (most
on whichof whom are extremely
the industry is likely close
to slip.toNote,
what therefore,
is going on at itthe
that is financial It is expect
coalface)
not predictive. not whatto
the CSFIor– fear
happen, may
or the happen.
author, David Lascelles – believes is going to happen. It is a distillation of what
others (most of whom are extremely close to what is going on at the financial coalface) expect to
So, don’torblame
happen, us that
fear may earlier surveys didn’t always get it right. In particular, don’t blame us that,
happen.
in 2005 and 2006, pride of place at the top of the Banana Skins list went to “too much regulation”.
That was blame
So, don’t what the industry
us that earlierfelt – though
surveys didn’tone can certainly
always make
get it right. a case thatdon’t
In particular, whatblame
the industry
us that,
really
in 2005 needed was either
and 2006, more
pride of placeregulation
at the topor,ofbetter still, smarter
the Banana regulation.
Skins list went to “too much regulation”.
That was what the industry felt – though one can certainly make a case that what the industry
That
reallysaid,
neededlooking at the
was either list regulation
more of the most important
or, better still, Banana
smarter Skins
regulation.since 1996 (page ??), it is
significant just how close to the top credit risk, derivatives and risk management have been. It
sometimes seems asatthough
That said, looking the listsenior
of thebankers (who are Banana
most important well-represented
Skins since in our
1996survey)
(page were
10), itlike
is
compulsive shoplifters,
significant just how close almost
to thebegging to be
top credit caught
risk, and to and
derivatives be put riskout of their (peer
management havepressure-
been. It
induced)
sometimes misery.
seems as though senior bankers (who are well-represented in our survey) were like
compulsive shoplifters, almost begging to be caught and to be put out of their (peer pressure-
But thosemisery.
induced) are conclusions for you, the reader, to make.

What we offer
But those is an increasingly
are conclusions for you, valuable settoofmake.
the reader, multi-year data on what keeps senior City types
awake at night – besides the size of their bonuses, of course. Over the next few months, we hope
to work
What wethe rawis data
offer that we have
an increasingly accumulated
valuable a bit harder,
set of multi-year datasince the science
on what of statistics
keeps senior has
City types
advanced in the– last
awake at night decade
besides the –size
andofthat
theirmay well generate
bonuses, some
of course. Overeven morefew
the next fascinating
months, findings.
we hope
But, in the
to work themeantime,
raw data no thatsurprise
we have thataccumulated
bankers today putharder,
a bit “political interference”
since the scienceatofthestatistics
top of their
has
Banana
advancedSkins
in thelist; at decade
last least, I –suppose
and thatthat’s
maybetter than the some
well generate threat even
of ritual
moredisembowelling which
fascinating findings.
seemed on the
But, in the cards only
meantime, a few months
no surprise ago. today put “political interference” at the top of their
that bankers
Banana Skins list; at least, I suppose that’s better than the threat of ritual disembowelling which
Andrew
seemed on Hilton
the cards only a few months ago.
Director
CSFI
Andrew Hilton
Director
CSFI

This report was written by David Lascelles


Cover by Joe Cummings
This report was written by David Lascelles
Cover by Joe Cummings

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C S F I / New York CSFI

Foreword
PricewaterhouseCoopers is delighted to sponsor another year of Banking Banana Skins.

It has been an extraordinary eighteen months for the banking industry since the last Banana Skins
was published in May 2008. Back then, few thought we would see so many banks either collapse
or require rescue; events since then make for a fascinating survey. This is the first economic crisis
that has drawn out long enough to have two Banana Skins published (let us hope it doesn’t
continue for a third!). Once again a brand new banana skin – political interference – heads the list.
Respondents are also beginning to focus on what comes after the crisis, although many retain fears
that the worst is not yet over, hence credit risk retains its number two spot.

A worrying theme is the question of whether the crisis has taken the industry’s future out of its
own hands. With political interference as the top risk and too much regulation at number three
there is clear sense that change may be forced onto the industry from outside. Many respondents
make the point of how deeply unpopular the banks have become among the populace at large. The
need to rebuild trust that the last survey highlighted has become even more acute.

It is always interesting to look back at the previous survey to see which of the top banana skins
were slipped on subsequently. Liquidity was the top risk last time and came closer in the autumn
of 2008 to bringing the entire system down than any previous banana skin. The survey does get it
right sometimes and so this year’s survey could be a well timed warning for politicians not to
overreact.

As ever there is a richness of perceptive comment threaded through the survey which repays a
careful read.

John Hitchins
UK Banking Leader
PricewaterhouseCoopers (UK)

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C S F I / New York CSFI

About this survey


This survey describes the risks currently facing the global banking industry, as seen by a wide
range of bankers, banking regulators and close observers of the banking scene around the world.
The survey was carried out in November and December 2009, and received 443 responses from
individuals in 49 countries. The questionnaire (reproduced in the Appendix) was in three parts. In
the first, respondents were asked to describe, in their own words, their main concerns about the
financial system over the next 2-3 years. In the second, they were asked to rate a list of potential
risks, or Banana Skins, selected by a CSFI/PwC panel, both by severity and whether they were
rising, steady or falling. In the third, they were asked to rate the preparedness of financial
institutions to handle the risks they identified. Replies were confidential, but respondents could
choose to be named.
The breakdown of respondent by type was:

Regulators
6%

Observers
32%
Bankers
62%

The responses by country were as follows:

Australia 11 Greece 8 Philippines 2


Austria 5 Guernsey 2 Poland 7
Bahrain 1 Hong Kong 2 Qatar 1
Belgium 3 Hungary 3 Romania 13
Bermuda 2 India 12 Russia 31
Brazil 1 Ireland 4 Serbia 1
Canada 16 Italy 2 Singapore 6
Cayman Is. 1 Japan 4 Slovakia 1
Croatia 1 Jersey 6 South Africa 6
Czech Rep. 9 Kazakhstan 5 Spain 2
Denmark 1 Kenya 1 Sweden 13
Finland 10 Luxembourg 9 Switzerland 17
France 1 Malta 1 Thailand 1
GCC 1 Mauritius 1 UK 156
Germany 17 Multinational 4 Ukraine 1
Gibraltar 1 Netherlands 7 US 29
New Zealand 4

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C S F I / New York CSFI

Summary
Summary
ThisThis
report
report
describes
describes
the the
riskrisk
outlook
outlook
for for
the the
banking
bankingindustry
industry
at the
at the
turnturn
of of Banking
Banking
Banana
Banana
Skins
Skins
2010
2010
the theyearyear2010 2010– –a atimetimeof of (2008
(2008
ranking
ranking
in brackets)
in brackets)
unprecedented
unprecedented stress
stress
in the
in the
financial
financial
markets.
markets.
TheThefindings
findings
are are
basedbased
on on 1 Political
1 Politicalinterference
interference (-) (-)
The
Thebiggest
biggest
responses
responsesfromfrommore morethanthan400400 2 2 Credit
Credit risk risk
(2) (2)
Banana
Banana Skin
Skin
is is bankers,
bankers, regulators
regulators andand close close 3 Too much
3 Too much regulation
regulation(8) (8)
political
political observers
observers
of the
of the
banking
bankingscene
scene
in 49
in 49 4 Macro-economic
4 Macro-economic trends (5) (5)
trends
countries.
countries.
interference
interference 5 Liquidity
5 Liquidity (1) (1)
6 Capital
6 Capital availability (-) (-)
availability
TheThe dashdashby by governments
governments to rescue
to rescue
7 Derivatives
7 Derivatives (4) (4)
theirtheir
banksbanksfromfrom the thefinancial
financialcrisiscrisis
maymay havehavestaved
stavedoff off
a collapse
a collapse of theof the 8 Risk management
8 Risk management quality (6) (6)
quality
system,
system, but butit hasit hasleft left
the the banking 9
banking Credit
9 Creditspreadsspreads (3) (3)
industry
industry deeply politicised, a a 10
deeply politicised, Equities
10 Equities (7) (7)
development
development whichwhich respondents
respondents to to 11 Currencies
11 Currencies (13)(13)
thisthis
survey
survey findfindto be to bethe thegreatest
greatest 12 Corporate
12 Corporate governance
governance (16)(16)
source
sourceof risk
of risk
nownow facing
facing
the the
banking
banking 13 Commodities
13 Commodities (12)(12)
sector.
sector. 14 Interest
14 rates
Interest (9) (9)
rates
15 Fraud
15 Fraud(11)(11)
As As a risk,
a risk, political
political interference
interference
16 Management
16 Management incentives
incentives (17)(17)
(making
(making its itsfirstfirst
appearance
appearance as as a a
Banana
Banana SkinSkin thisthisyear)year)has has many many 17 Emerging
17 Emerging markets
markets (18)(18)
angles:
angles:it itdistorts commercial 18
distortscommercial HighHigh
18 dependence
dependence on technology
on technology (15)(15)
judgment,
judgment, it creates
it creates
moralmoralhazard,
hazard,andand 19 Hedge
19 Hedge funds (10)(10)
funds
it raises
it raisesuncertainty
uncertainty aboutabouthowhow andand 20 Rogue
20 Rogue trader (14)(14)
trader
whenwhenfinancial
financialsupport supportwillwillbe be 21 Business
21 Business continuation
continuation (23)(23)
removed.
removed. Closely
Closelylinked
linked
is theis the
riskrisk
of of 22 Retail
22 sales
Retail practices
sales practices(20)(20)
too too
much muchregulation
regulation (No.(No.3) from
3) from an an 23 Conflicts
23 Conflicts of interest
of interest(21)(21)
over-reaction
over-reaction to the
to the
crisis.
crisis. 24 Back
24 office
Back (19)(19)
office
25 Environmental
25 Environmental risk risk
(25)(25)
WhatWhat is striking
is striking about about
these these
Banana
Banana
Skins
Skinsis that
is that
theytheyare are
commoncommon to allto all 26 Payment
26 Payment systems
systems (27)(27)
major
majorbanking
banking regions,
regions,andand are are
sharedshared 27 Money
27 Money laundering
laundering (24)(24)
by bankers
by bankers andand non-bankers
non-bankers alike.
alike. 28 Merger
28 Merger mania mania(28)(28)
Pessimism
Pessimismabout
about 29 TooToo
29 littlelittle
regulation
regulation (29)(29)
thethe
global
global TheThe dominant
dominant factorfactor
shaping
shaping riskrisk 30 Competition
30 Competition fromfromnewnew entrants (30)(30)
entrants
perceptions
perceptionsis the
is the
statestate
of the
of the
worldworld
economic
economic economy.
economy. Respondents’
Respondents’ comments
comments about macro-economic
about macro-economic trends
trends
(No.(No.
4) were
4) were
outlook
outlook broadly
broadly
pessimistic,
pessimistic,
viewing
viewingthe the
recent
recent
signssigns
of recovery
of recoveryas fragile
as fragile
andand
vulnerable
vulnerable
to to
further
further
shocks.
shocks.
ThisThis
accounts
accountsfor for
the the
highhigh
position
position
occupied
occupied by credit
by credit
riskrisk
(No.(No.
2) 2)
where
where
the the
outlook
outlook
is seen
is seen
to beto for
be for
further
further
losses
losses
as the
as the
truetrue
costcost
of the
of the
crisis
crisis
is is
counted,
counted,
andand
the the
lagging
lagging
effect
effect
of the
of the
recession
recession
takes
takes
its toll
its toll
on borrowers.
on borrowers.

Although
Althoughliquidity
liquidityriskrisk
(No.(No.
5) has
5) has
slipped
slipped
fromfromthe the
top top
position
position
it occupied
it occupiedin the
in the
last last
survey
survey
in mid-2008,
in mid-2008, it remains
it remains
a high
a high
levellevel
concern.
concern.
Tension
Tension
in other
in other
financial
financial
markets,
markets,
however,
however, is seen
is seen
to beto easing,
be easing, notably in derivatives
notably in derivatives (No.(No. credit
7), 7), credit
spreads
spreads
(No.(No.
9) and equities
9) and equities
(No.(No.
10).10).
OneOne market
market
wherewhere
riskrisk
is seen
is seen
to beto rising
be rising
is is
currency
currency (up (up
fromfrom No.No.13 to
13 No.
to No.
11) 11)
withwithattention
attention
focusing
focusing
particularly
particularly
on the
on the
prospects
prospects
for for
the the
US US dollar.
dollar.
Concern
Concern
has has
alsoalso
easedeased
about
about
the the
outlook
outlook interest
for for interest
ratesrates
(down
(downfromfromNo.No. 9 to9No.
to No.
14):14):
although
althougha sharp
a sharp
riserise
in rates
in rates
maymaybe imminent
be imminent
in anin environment
an environment of dramatic
of dramatic monetary
monetaryeasing,
easing,
it isitalso
is also
veryvery
predictable.
predictable.
Another
Another
notable
notable
decline
declineis the
is the
riskrisk
associated
associated hedge
withwith hedgefundsfunds
(down(down
fromfrom
No.No.
10 to10No.to No.

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C S F I / New York CSFI

19) with
19) with
a falling
a falling
off in
offtheir
in their
aggressive
aggressive
activity,
activity,
but also
but also
an appreciation
an appreciation
that that
they they
may may
be less
be less
threatening
threatening
to financial
to financial
stability
stability
than than
the banks
the banks
themselves.
themselves.
TheThe
availability
availability
Making
Making
its first
its first
appearance
appearancein the
in Banana
the Banana
SkinsSkins
series, the availability
series, the availability
of capital
of capital
of capital
of capital
is is (No.(No.
6) is6)seen
is seen
as anasarea
an area
of high
of high
risk risk
as banks
as banks
try totryrebuild
to rebuild
theirtheir
balance
balance
sheets.
sheets.
a big
a big
worry
worry Although
Although
therethere
havehave
beenbeena number
a numberof large
of large
recapitalisations
recapitalisations
in the
in crisis,
the crisis,
investor
investor
appetite
appetite
couldcould
weaken;
weaken;therethere
will will
also also
be selling
be selling
pressure
pressure
as governments
as governments seekseek
to to
offload
offload
theirtheir
stakes
stakes
in theinmedium
the mediumterm.term.

BigBig
movers
movers
RISING
RISING
RISKS
RISKS
Political
Political
interference:
interference:
distorts
distorts
commercial
commercialjudgment,
judgment,
creates
creates
moralmoral
hazard.
hazard.
Too much
Too much
regulation:
regulation:
over-reaction
over-reaction
to thetocrisis.
the crisis.
Capital
Capital
availability:
availability:
hugehuge
demands,
demands,weakening
weakeninginvestor
investor
appetite.
appetite.
Corporate governance:
Corporate governance:will banks
will banks
learnlearn
lessonslessons
fromfrom
the crisis?
the crisis?
Currencies:
Currencies:
worries
worries
aboutabout
US dollar
US dollar
volatility.
volatility.

FALLING
FALLING
RISKS
RISKS
Liquidity:
Liquidity:
not the
notproblem
the problem
it wasit awas
year
a year
ago. ago.
Credit spreads,
Credit spreads,
derivatives,
derivatives,
equities,
equities,
interest
interest
rates:rates:
markets
markets
getting
getting
backback
to to
normal.
normal.
HedgeHedge
funds:
funds:
off the
offradar
the radar
screenscreen
so farsoasfarrisk
as is
risk
concerned.
is concerned.
BackBack
office:
office:
has stood
has stood
up well
up in
well theincrisis.
the crisis.
FraudFraud
and rogue
and rogue
trader:
trader:
fewerfewer
incidents
incidents
thanthanmightmight
be expected
be expected
in a crisis
in a crisis
period.
period.

Some Some
of theof risks
the risks
facing
facing
banksbanks
are seen
are seen
to betoself-generated.
be self-generated. Concern
Concern
aboutabout
the the
quality of risk
quality of risk
management
management (No.(No.8) remains
8) remainshighhigh
following
following
the disastrous
the disastrous
losseslosses
suffered
suffered
in thein last
the last
two two
years.
years.
The Therisk risk
of poor corporate
of poor corporategovernance
governancehas risen
has risen
sharply
sharply
(from (from
No. No.
16 to16No.
to No.
12), 12), management
and and management incentives
incentives
(No.(No.
16) remain
16) remaina a
preoccupation,
preoccupation, though
though
opinion
opinion
is divided
is divided
between
between
bankers
bankers
whowhoconsider
consider
the risk
the risk
to to
be outside
be outside interference
interference
and and
non-bankers
non-bankers who whosee see
bad badincentives
incentives
encouraging
encouraging
excessive
excessiverisk-taking.
risk-taking.
Concern
Concern aboutaboutconflicts
conflicts
of interest
of interest within
within
financial
financial
institutions
institutions
seems seems
to beto easing
be easing(down (down
fromfrom No. No.
21 to 21 No.
to No.
23). 23).
Many Manyof the
of the
responses
responses
in thein governance
the governance
area area
wereweretingedtinged
withwith
the worry
the worry banks
that that banks
havehave
not not
learnt
learnt
lessons
lessons
fromfrom
the crisis
the crisis
and areandtooareeager
too eager
to get
toback
get back
to business
to business
as usual.
as usual.

‘Green
‘Green
risks’
risks’ On the
On operational
the operational
risk risk
front,front,
therethere
was wasa notable
a notable
decline
decline
in concern
in concern fraud
aboutabout fraud
(down(down
fromfrom
No. No.
11 to11No.
to No.
15) and and rogue
15) the the roguetrader
trader
(down (down
fromfrom
No. No.
14 to14No.to No.
20) 20)
areare
seen
seen
to be
to be despite
despite
experience
experience
whichwhich
sayssays
that that
bothboth
risksrisks
rise rise
in a inrecession.
a recession.
However
However the the
small
small
despite
despite ranking
ranking
of these
of these
risksrisks
is closely
is closely
linkedlinked
to theto number
the numberof recent
of recent
incidents,
incidents,
of which
of which
therethere
havehave
beenbeen
few few
(Madoff
(Madoffnot being
not being
strictly
strictly
a bank
a bank
fraud).
fraud).
Concerns
Concernsaboutabout
risksrisks
climate
climate
change
change in theinback
the back
office,
office,
payment
payment
systems
systems
and business
and businesscontinuation
continuation – all–ofallwhich
of which
onceonce
featured
featured
highhigh
as Banana
as BananaSkinsSkins
– have
– have
easedeased
considerably.
considerably.ThereThere
has also
has also
beenbeen
a falla fall
in the
in ranking of money
the ranking of moneylaundering
laundering(down (down
fromfrom
No. No.
24 to24No.to No.
27) which
27) which
is now is now
viewed
viewed
as a as
reputational
a reputational
ratherrather
than than
financial
financial
risk.risk.
The The
perception of environmental
perception of environmental
risk risk
(No.(No.
25) was
25) was
unchanged
unchanged despite
despite
the heat
the heat
generated
generated
by thebyCopenhagen
the Copenhagen Summit.Summit.

Although competition
Although competition
fromfrom
newnewentrants
entrants
(No.(No.
30) was
30) was
seenseen
to betothe
be least
the least
of theof the
risksrisks
facing
facing
the industry,
the industry,
it generated
it generated
muchmuch
comment
comment
fromfrom
respondents
respondentsaboutabout
the the
dangers
dangers
of weakened
of weakened
bankbank
competition
competition
and greater
and greater
complacency
complacencydue to
duegovernment
to government
bail-outs
bail-outs
and higher
and higher
regulatory
regulatory
entryentry
barriers.
barriers.
The The
prospects
prospects
for structural
for structural
change,
change,
as as
measured
measured
by the
byrisk of merger
the risk of merger
maniamania
(No.(No.
28), 28),
werewere
seenseen
to betosmall.
be small.

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A break-down
A break-down of responses
of responsesshowsshows
an unusually
an unusuallyhighhigh
levellevel
of agreement
of agreementamong among
bankers
bankers
and non-bankers
and non-bankers aboutabout
the main
the main
Banana
Banana
Skins.
Skins.
Insofar
Insofar
as there
as there
are nuances,
are nuances,
bankers
bankers
are mainly
are mainlyconcerned
concerned
withwiththe political
the political
and and
regulatory
regulatory
fall-out
fall-out
fromfrom
the the
crisis,
crisis, non-bankers
and and non-bankers are worried
are worried
that that
banksbanks
will will
fail to
failreform
to reform
themselves,
themselves,
and and
merely
merely
headhead
straight
straight
into into
a newa new
crisis. Regulators
crisis. Regulators
focused
focused
on theon quality
the quality
of balance
of balance
sheets
sheets
and risk
and risk
management.
management. Geographically,
Geographically, concerns
concerns
werewerealso also
strikingly
strikingly
similar
similar
in the
in three
the three
regions
regions
surveyed:
surveyed:
NorthNorth
America,
America,
Europe
Europeand and
the Asia-Pacific:
the Asia-Pacific:all all
considered
considered
political
political
interference,
interference,
regulatory
regulatory
overkill
overkill
and credit
and credit
risk risk
to betoamong
be amongthe the
biggest
biggest
dangers
dangers
facing
facing
the industry.
the industry.
Only
Only
9%9%
of of
respondents
respondents think
think Preparedness.
Preparedness.We asked
We asked
respondents
respondents
howhowwell well
prepared
prepared
they they
thought
thought
the industry
the industry
banks
banks
areare
well
well was was
to handle
to handle
the risks
the risks
they they
had identified.
had identified.
OnlyOnly
9 per9 cent
per cent
answered
answered
“well”
“well”
and 11
and 11
per cent
per cent
answered
answered“poorly”.
“poorly”.
The The
remainder
remainder
gavegave
a “mixed”
a “mixed”
reply.
reply.
ThisThis
is a is
more
a more
prepared
prepared negative
negative
resultresult
thanthan
last time
last time
whenwhen
24 per
24 cent
per cent
said said
“well”
“well”
and only
and only
4 per4 cent
per cent
said said
to handle
to handle
risk
risk “poorly”.
“poorly”.

TheThe
Banana
Banana
Skins
Skins
Index
Index
5 5
EquityEquity
4.5 4.5 mkts mkts CreditCredit Liquidity
Liquidity
4 4 risk risk Too much
Too much
regulation
regulation Political
Political
Score
Score

3.5 3.5Poor Poor interference


interference
Derivatives
Derivatives
risk mgt
risk mgt
3 3
2.5 2.5
2 2
98

89

09
01
0 001
2
23

34
0054
0 005
6
67

78

80
10
9 99

0 09

0 00

0 00

0 00

0 00

0 00

0 01
19
119

129

220

220

220

220

2200
220

220

220

220

20
Top risk
Top risk
Avg.Avg.
of allof
risks
all risks

The The
Banana
Banana
SkinsSkins
Index
Index
tracks
tracks
responses
responses
overover
timetime
and and
can be
canread
be read
as anasindicator
an indicator
of anxiety
of anxiety
levels
levels
on a on
scale
a scale
of 1-5.
of 1-5.
The The
top line
top line
showsshows
the average
the average
scorescore
givengiven
to the
to the
top risk
top risk
overover
the last
the last
12 years,
12 years,
and and
the bottom
the bottom
line line
the average
the average
of all
of the
all risks.
the risks.
TheTheBanana
Banana Skins
Skins Although
Although
the top
the risk
top risk
has has
fallen
fallen
off, off,
the All-risk
the All-risk
indexindex
is atisanatall-time
an all-time
high,high,
an an
Index
Indexis at
is an
at an indication
indication
of the
ofexceptional
the exceptional
levellevel
of anxiety
of anxiety
currently
currently
gripping
gripping
the market.
the market.
all-time
all-time
highhigh
The The
course
course
of theof index
the index
overover
the last
the decade
last decade
shows shows
the finance
the finance
sector
sector
emerging
emerging
in a in a
bullish
bullish
mood mood
fromfromthe late
the 1990s
late 1990s
but running
but running
into into
the frenzy
the frenzy
of the
ofdot
the com
dot com
crashcrash
in in
the early
the early
2000s.2000s.
Although
Althoughthe top
the risk
top risk
peaked
peaked
in 2000,
in 2000,
the overall
the overall
anxiety
anxiety
levellevel
continued
continued
to rise
to rise
for two
for two
yearsyears
in the
in messy
the messy
aftermath.
aftermath.
The The
risk risk
levellevel
thenthen
subsided
subsided
as stability
as stability
returned
returned
to the
to markets.
the markets.
However
Howeverthe first
the first
indications
indications
of anxiety
of anxiety
aboutabout
the soundness
the soundness
of the of bull
the bull
run appeared
run appeared
in the
in 2006
the 2006
survey
survey
withwith
a sharp
a sharp
rise rise
in thein the
All-risk
All-risk
index,index,
which which
has continued
has continued
withwith
the present
the present
poll.poll.

6 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

Who
Whosaid
said
what
what
A breakdown
A breakdown
of the
oftop
the ten
topresponses
ten responses
by type
by type
shows
shows
different
different
levels
levels
of concern.
of concern.

Bankers
Bankers
– practitioners
– practitioners
of commercial
of commercial
andand
investment
investment
banking
banking
1 Political
1 Political
interference
interference Bankers
Bankers
put political
put political
interference
interference
at the
at top
the of
top of
2 Too
2 Too
much much
regulation
regulation theirtheir
risk risk
list because
list because
of theof pressure
the pressure
it creates
it creates
3 Credit
3 Credit
risk risk to override
to override commercial
commercial judgment,
judgment, e.g. e.g.
by by
4 Liquidity
4 Liquidity forcing
forcing
themthem to lendto lend
in a inrecession.
a recession.
Concern
Concern
aboutabout
a regulatory
a regulatory over-reaction
over-reaction to tothe the
5 Derivatives
5 Derivatives
financial
financial
crisiscrisis
is closely
is closelylinked.
linked.
Bankers’
Bankers’
6 Macro-economic
6 Macro-economic trends
trends
worries
worries
also also
include
include
a worsening
a worseningcreditcredit
outlook
outlook
7 Capital
7 Capital
availability
availability as bad
as bad
debtsdebtscontinue
continue
to pile
to pile
up, up,
and and
the the
8 Risk
8 Risk
management
management quality
quality availability
availability
of newof new
capital.
capital.
TheirTheir
concern
concern
withwith
9 Credit
9 Credit
spreadsspreads liquidity
liquidity
risk risk
and andthe thederivatives
derivatives market,
market,
10 Equities
10 Equities particularly
particularly
creditcredit
default
default
swaps,swaps,
remains
remains
high.high.

Bankers,
Bankers, Observers
Observers
– non-bankers,
– non-bankers,
analysts,
analysts,
consultants,
consultants,
academics
academics
observers
observers and and Non-banker
Non-banker respondents
respondents shareshare
the the
bankers’
bankers’
1 Political
1 Political
interference
interference
regulators
regulatorsagree
agree 2 Macro-economic
2 Macro-economic trends
trends concerns
concerns
aboutaboutpolitical
political
interference,
interference,though
though
ononthethe
bigbig
risks,
risks, 3 Credit
3 Credit
risk risk for different
for different
reasons:
reasons:
theytheyare worried
are worried aboutabout
the moral
the moral
hazardhazard
created
created
by bank
by bank
rescues
rescues
and and
butbut
differ
differ
ononthethe 4 Too
4 Too
much much
regulation
regulation
wonder
wonder
whether
whether
bankers
bankers
havehave
learntlearnt
lessons
lessons
5 Capital
5 Capital
availability
availability
detail
detail 6 Risk
6 Risk
management
management quality
quality
fromfrom
the crisis.
the crisis.
TheyThey
also also
suspect
suspect
that that
banks banks
havehave
not got
not togotthe
to bottom
the bottom
of their
of their
bad bad
loans,loans,
7 Liquidity
7 Liquidity and and
are skimping
are skimping on their
on their
risk risk
management.
management.
8 Credit
8 Credit
spreads
spreads Non-bankers
Non-bankers are the
are most
the mostpessimistic
pessimisticof the
of the
9 Currencies
9 Currencies major
major
respondent
respondent
groupsgroups
aboutabout
the economic
the economic
10 Equities
10 Equities prospects,
prospects,
fearing
fearing
a ‘double
a ‘double
dip’ dip’
recession.
recession.

Regulators
Regulators
– supervisors,
– supervisors,
government
government
officials
officials
1 Credit
1 Credit
risk risk The Theprospect
prospect
of another
of anotherwavewave
of badof bad
debtsdebts
2 Political
2 Political
interference
interference heads heads
the concerns
the concerns
of regulators
of regulators
as recession
as recession
3 Liquidity
3 Liquidity takestakes
its toll
its on
tollborrowers
on borrowers – and– and
uncertainties
uncertainties
4 Currencies
4 Currencies still still
cloudcloud
the the
financial
financial
markets.
markets.
Liquidity,
Liquidity,
currency,
currency,
creditcredit
spreads
spreads
and and
commodity
commodityrisk risk
5 Macro-economic
5 Macro-economic trends
trends
are all
arehigh
all high
on their
on their
list. Regulators
list. Regulators
also also
worry worry
6 Credit
6 Credit
spreads
spreads
aboutaboutpolitical
political
interference,
interference,in their
in their
casecase
7 Corporate
7 Corporategovernance
governance because
because
of theof the
uncertainty
uncertaintyaboutabout
how howand and
8 Commodities
8 Commodities whenwhen governments
governments will willwithdraw
withdraw theirtheir
9 Risk
9 Risk
management
management quality
quality support.
support.
The Theweaknesses
weaknesses in bank
in bank
governance
governance
10 Capital
10 Capital
availability
availability exposed
exposed
by thebycrisis
the crisis
are another
are another
concern.
concern.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 7


C S F I / New York CSFI

North
North
America
America
1 Political
1 Political
interference
interference Government
Government intrusion
intrusion
into into
the banking
the banking
system
system
2 Credit
2 Credit
risk risk through
through
bail-outs
bail-outs
and and
official
official
support
support
headsheads
3 Too
3 Too
much much
regulation
regulation the list
the of
listrisks
of risks
in North
in North
America,
America,
notably
notably
in in
4 Liquidity
4 Liquidity the US.
the US.
Canadian
Canadian
banks banks
are more
are more
concerned
concerned
aboutabout
the threat
the threat
of regulatory
of regulatoryover-reaction.
over-reaction.
5 Macro-economic
5 Macro-economic trends
trends
The The
immediate
immediateconcerns
concerns
in both
in both
countries
countries
are are
6 Risk
6 Risk
management
management quality
quality
veryvery
muchmuch withwith
crisiscrisis
fall-out:
fall-out:
credit
credit
and and
7 Corporate
7 Corporategovernance
governance liquidity
liquidity
risk,risk,
and and
the the
shaky shaky
prospects
prospects
for for
8 Derivatives
8 Derivatives economic
economic recovery.
recovery.
There There
was wasless less
concern
concern
9 Credit
9 Credit
spreads
spreads aboutabout
the theavailability
availability
of capital
of capitalthanthan
in in
10 Capital
10 Capital
availability
availability Europe.
Europe.

Risks
Risks
areare Europe
Europe
similar
similar
across
across 1 Political
1 Political
interference
interference Europe
Europeis also
is also
deeplydeeply
concerned
concernedaboutabout
the the
consequences
consequences of government
of government involvement
involvement
thethe
major
major 2 Credit
2 Credit
risk risk
withwith
banks,banks,
notably
notably
in the
inUKthe where
UK wheretherethere
is a is a
3 Macro-economic
3 Macro-economic trends
trends
regions
regions 4 Too
4 Too
much much
regulation
regulation lot of
lotit,ofand
it, and
wherewhere
manymany respondents
respondents
werewere
located.
located.
LinkedLinked
to this
to this
is fearis fear
of a of
regulatory
a regulatory
5 Capital
5 Capital
availability
availability
over-reaction,
over-reaction,
particularly
particularlyby Brussels.
by Brussels.
Other Other
6 Liquidity
6 Liquidity
top top
concerns
concerns
focusfocus
on crisis-related
on crisis-relatedissues:
issues:
7 Risk
7 Risk
management
management quality
quality credit
credit
risk,risk,
capital,
capital,
liquidity,
liquidity,
and and
the credit
the credit
8 Credit
8 Credit
spreads
spreads derivative
derivative
markets.
markets.
The The economic
economic mood moodis is
9 Derivatives
9 Derivatives pessimistic,
pessimistic,
withwith
manymany respondents
respondentsworried
worried
10 Equities
10 Equities that the
thatrecovery
the recovery
will will
be long
be long
and difficult.
and difficult.

AsiaAsia
Pacific
Pacific
1 Too
1 Too
much much
regulation
regulation Respondents
Respondentsfromfrom
this this
regionregion
included
included
Japan,
Japan,
2 Macro-economic
2 Macro-economic trends
trends Australasia,
Australasia,
South South
EastEast
AsiaAsiaand and
IndiaIndia
– a– a
3 Credit
3 Credit
risk risk broadbroad
group group
exposed
exposed
to a to
variety
a variety
of risks.
of risks.
The The
4 Political
4 Political
interference
interference response
response
is notable
is notable
for the
for strength
the strength
of concern
of concern
aboutabout
regulatory
regulatory
over-reaction
over-reactionto theto the
crisis,
crisis,
5 Currencies
5 Currencies
particularly
particularly
in Australia,
in Australia,
and pessimism
and pessimism aboutabout
6 Commodities
6 Commodities
the economic
the economicoutlook,
outlook,
mainlymainly
because
because
of fears
of fears
7 Liquidity
7 Liquidity of aof‘bubble’
a ‘bubble’
in thein tiger
the tiger
economies
economies and and
a a
8 High
8 High
dependence
dependence
on tech.
on tech. collapse
collapse
of the
ofcredit
the credit
markets.
markets.
The The
regionregion
also also
9 Derivatives
9 Derivatives focused
focused
on the
on risks
the risks
of fraud
of fraud
and and
the banking
the banking
10 Fraud
10 Fraud system’s
system’s
highhigh
technological
technologicaldependence.
dependence.

8 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

Industrial countries
Industrial countries
1 Political
1 Political
interference
interference The The
concerns
concerns
of industrial
of industrial
countries
countries
centrecentre
on on
2 Too
2 Too
much much
regulation
regulation the the
political
political
fall-out
fall-out
fromfromthe the
crisis:
crisis:
the the
3 Liquidity
3 Liquidity impact
impact
of government
of government ownership
ownership
and support,
and support,
4 Credit
4 Credit
risk risk and and
the ensuing
the ensuingregulatory
regulatory
crackdown,
crackdown,which which
is widely
is widely
seenseen
as potentially
as potentially
damaging
damaging to the
to the
5 Macro-economic
5 Macro-economic trends
trends
banking
banking
system.
system.
The The
mostmost
pressing
pressing
risksrisks
for for
6 Capital
6 Capital
availability
availability
the banks
the banks
remainremain
on theon credit
the credit
front,front,
withwith
the the
7 Risk
7 Risk
management
management quality
quality possibility
possibility
of another
of another
wavewaveof bad
of bad
debts,debts,
and and
8 Credit
8 Credit
spreads
spreads continuing
continuing
liquidity
liquidity
difficulties,
difficulties,
despite
despite
recentrecent
9 Corporate
9 Corporate governance
governance improvements.
improvements. Recapitalisation
Recapitalisation
couldcould
be abe a
Industrial
Industrial
andand 10 Derivatives
10 Derivatives problem.
problem.
There There
is caution
is caution
aboutabout
the economic
the economic
outlook.
outlook.
emerging
emerging
economies
economies have
have
Emerging
Emerging
economies
economies
different
different
concerns
concerns
1 Credit
1 Credit
risk risk The The
top concerns
top concernsin thein emerging
the emergingworld world
are are
2 Credit
2 Credit
spreads
spreads all linked
all linked
to financial
to financial
pressures
pressures
arising
arising
fromfrom
3 Macro-economic
3 Macro-economic trends
trends the crisis:
the crisis:
bad loans
bad loans
and difficult
and difficult
markets.
markets.
The The
4 Currencies
4 Currencies risksrisks
in thein macro-economic
the macro-economic outlook
outlook
are seen
are seen
to betoparticularly
be particularly
high,high,
for example
for example
in Russia
in Russia
5 Risk
5 Risk
management
management quality
quality
wherewhere
the economy
the economy is fragile,
is fragile,
and and
in thein Far
the Far
6 Fraud
6 Fraud
EastEast
where where
‘bubbles’
‘bubbles’
are feared
are feared
to betobuilding
be building
7 Political
7 Political
interference
interference up. On
up. the
On other
the other
hand,hand,
concern
concern
aboutabout
political
political
8 Equities
8 Equities and and
regulatory
regulatorypressures
pressures
is lower
is lowerthanthan
in in
9 Too
9 Too
much much
regulation
regulation industrial
industrial
countries.
countries.
The Thehighhigh
placeplace
takentaken
by by
10 Capital
10 Capital
availability
availability fraudfraud
is notable,
is notable,
againagain
possibly
possibly
driven
driven
by the
by the
economic
economic downturn.
downturn.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 9


C S F I / New York CSFI

Banana Skins: The Top Ten 1996-2010


1996 1998 2000
1 Poor management 1 Poor risk management 1 Equity market crash
2 EMU turbulence 2 Y2K 2 E-commerce
3 Rogue trader 3 Poor strategy 3 Asset quality
4 Excessive competition 4 EMU turbulence 4 Grasp of new technology
5 Bad lending 5 Regulation 5 High dependence on tech.
6 Emerging markets 6 Emerging markets 6 Banking market o’-capacity
7 Fraud 7 New entrants 7 Merger mania
8 Derivatives 8 Cross-border competition 8 Economy overheating
9 New products 9 Product mis-pricing 9 Comp from new entrants
10 Technology foul-up 10 Grasp of technology 10 Complex fin. instruments

2002 2003 2005


1 Credit risk 1 Complex financial instruments 1 Too much regulation
2 Macro-economy 2 Credit risk 2 Credit risk
3 Equity markets 3 Macro economy 3 Corporate governance
4 Complex financial instruments 4 Insurance 4 Derivatives
5 Business continuation 5 Business continuation 5 Hedge funds
6 Domestic regulation 6 International regulation 6 Fraud
7 Insurance 7 Equity markets 7 Currencies
8 Emerging markets 8 Corporate governance 8 High dependence on tech.
9 Banking market over-capacity 9 Interest rates 9 Risk management
10 International regulation 10 Political shocks 10 Macro-economic trends

2006 2008 2010


1 Too much regulation 1 Liquidity 1 Political interference
2 Credit risk 2 Credit risk 2 Credit risk
3 Derivatives 3 Credit spreads 3 Too much regulation
4 Commodities 4 Derivatives 4 Macro-economic trends
5 Interest rates 5 Macro-economic trends 5 Liquidity
6 High dependence on tech. 6 Risk management 6 Capital availability
7 Hedge funds 7 Equities 7 Derivatives
8 Corporate governance 8 Too much regulation 8 Risk management quality
9 Emerging markets 9 Interest rates 9 Credit spreads
10 Risk management 10 Hedge funds 10 Equities

Some Banana Skins come and go, some are hardy perennials. The Top Ten since
1996 show how concerns have changed over more than a decade. The 1990s were
dominated by strategic issues: new types of competition and technologies, dramatic
developments such as EMU, the Internet and Y2K. Many of these faded, to be
replaced by economic and political risks and particularly by concern over the growth
of regulation. The period after 2000 also saw the rise of newfangled risks such as
derivatives and hedge funds, the latter making their first appearance in 2005. The
2008 survey, conducted at the height of the crisis, brought the focus sharply onto
credit and market risks, and propelled two new entrants to the top of the charts:
liquidity and credit spreads. This year’s survey shows a preoccupation with the crash
aftermath: lingering debt and funding problems, but also looming questions about
the state of the world economy and the intrusion of government into the banking
sector.

10 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

1. 1.
Political
Political
interference
interference
(-)(-)
The The
dashdash
by governments
by governmentsto rescue
to rescue
theirtheir
banksbanks
fromfrom
disaster
disaster
may may
havehave
staved
staved
off aoff a
collapse
collapse
of the
of system,
the system,
but it
buthas
it has
left left
the banking
the banking
industry
industry
deeply
deeply
politicised,
politicised,
a a
development
development
which
which
is seen
is seen
by our
by respondents
our respondents
to betothe
begreatest
the greatest
risk risk
nownowfacing
facing
the the
finance
finance
sector.
sector.

Political
Political
interference
interference
on this
on this
scalescale
beingbeingrare,rare,
it has
it never
has never
beforebefore
appeared
appeared
in 15in 15
yearsyears
of Banana
of Banana
SkinsSkins
surveys
surveys
(though
(though“political
“political
shocks”
shocks”
suchsuch
as revolutions
as revolutions
and and
warswars
have).
have).
But concern
But concern
aboutabout
it is strong
it is strong
and widespread,
and widespread,and it
and
includes
it includes
bankers
bankers
as as
well well
as non-bankers,
as non-bankers,
eveneven
regulators.
regulators.
Geographically,
Geographically,
it came
it came
top top
of the
of list
the in
list in
Europe
Europe
and North
and North
America,
America,
and No.
and 4No. in 4theinAsia
the Asia
Pacific
Pacific
region.
region.

Concern
Concern
falls falls
into into
threethree
areas.
areas.
Political
Political
meddling
meddling
in banking
in bankingis is is theismoral
One One the moral
hazard
hazard
created
created
by bank
by bank
rescues.
rescues.
The The
managing
managing
director
director
of risk
of risk
at a at a
invariably
invariably largelarge
US bank
US banksaid said
that that
it hadit had
already
already
begun begun
to breed
to breed
complacent
complacent
attitudes:
attitudes:
“We'll“We'll
always
always
be bailed
be bailed
out”.out”.
Ros RosAltmann,
Altmann,
a policy
a policy
adviser
adviser
at the
at London
the London SchoolSchool
of of
‘negative’
‘negative’ Economics,
Economics, said said
that that
banksbanks
nownow assumed
assumed
that that
theythey
cannot
cannot
fail “which
fail “which
distorts
distorts
theirtheir
operational
operationaldecisions
decisions
and and
permits
permits
different
different
behaviour
behaviour
thanthan
wouldwould
otherwise
otherwise
be thebe the
case.case.
TheyTheyalso also
knowknowthat that
governments
governmentsneedneed
bankbank
shareshare
prices
prices
to stay
to stay
strongstrong
in in
orderorder
to offload
to offload
taxpayer
taxpayer
stakesstakes
in future
in future
which,
which,
again,
again,
givesgives
themthemthe one-way
the one-way
option
option
of reaping
of reaping
the rewards
the rewards of risk-taking,
of risk-taking,
but but
not not
suffering
suffering
the penalties
the penalties
of of
failure”.
failure”.

The Thesecond
second
is the politicisation
is the politicisationof lending.
of lending. HavingHaving
bailed bailed
the the
banksbanksout, out,
governments
governmentsare pushing
are pushing
themthem
to keep
to keep
lending
lending
through
through
the recession,
the recession,
against
against
theirtheir
better
better
judgment.
judgment.
A director
A director
at a atlarge
a large
UK UK bankbank
said said
that that
“political
“political
meddling
meddling
in the
in the
financial
financial
sector
sector
is almost
is almost
universally
universally
contradictory
contradictoryand and
negative.
negative.
One One
can'tcan't
lendlend
moremore
to support
to support
the economy
the economyand build
and build
up capital
up capital
basesbases
at theat same
the same
time”.
time”.
A credit
A credit
analyst
analyst
at a large
at a large
Japanese
Japanese
bankbank
said said
that that
“political
“political
interference
interference
in both
in both
banking
banking
and and
regulation
regulation
is likely
is likely
to lead
to lead
to a tomis-allocation
a mis-allocation of resources,
of resources,whichwhich
will will
probably
probably
increase,
increase,
not decrease,
not decrease,
the risk
the profile
risk profile
of theofsystem”.
the system”.

The The
thirdthird
concern
concernis howis how
governments
governments will will
withdraw
withdraw theirtheir
support
supportwithout
without
upsetting
upsetting
the banking
the banking systemsystem
and andjeopardising
jeopardising
the recovery.
the recovery.
A respondent
A respondentfromfrom
Ireland,
Ireland,
wherewhere
the government
the government is deeply
is deeply
involved,
involved,
said:said:
“Currently
“Currently
the system
the system
is is
extensively
extensively
supported
supportedby individual
by individual states.
states.
The The
ability
ability
of individual
of individual
banks,banks,
and and
the the
system
system
in general,
in general,
to extricate
to extricate
itselfitself
fromfrom
suchsuch
support
support
and and
raiseraise
capital
capital
on aon
stand-
a stand-
alonealone
basisbasis
is anisissue”.
an issue”.
The The
chiefchief
risk risk
officer
officer
of a of
large
a large
SouthSouth
African
African
bankbank
said:said:
“The“Themainmainimmediate
immediate concerns
concerns havehavebeenbeenalleviated
alleviated
through
throughgovernment
government
intervention.
intervention.
The The
remaining
remainingconcern
concernis mostly
is mostly
around
around
the disengagement
the disengagement process
process
of of
governments
governmentsfromfromtheirtheir
intervention,
intervention, and and
whether
whether
this this
wouldwould
occuroccur
in aninorderly
an orderly
way”.way”.

The The
futurefuture
of government
of government intervention
intervention
is also
is also
a crucial
a crucial
question
question
for regulators,
for regulators,
one one
of whom
of whom said said
that that
“premature
“premature withdrawal
withdrawal of government
of government support
support
couldcould
leaveleave
weakerweaker
banks banks
unable
unable
to finance
to finance
theirtheir
assetsassets
on aonsustainable
a sustainable
basisbasis
givengiven
theirtheir
highhigh
leverage”.
leverage”.
Several
Several
respondents
respondentsraised
raised
the additional
the additional
worry worry
that that
therethere
was was
no money
no money
left to
leftbail
to bail
banksbanks
out of
outa of
newa new
roundround
of failures.
of failures.
A senior
A senior
risk risk
officer
officer
at a at
large
a large
US US
bankbanksaid said
that that
“should
“should
the ‘green
the ‘green
shoots’
shoots’
proveprove
false,false,
and and
thesethese
countries
countries
havehave
exhausted
exhaustedtheirtheir
resources,
resources,
no company
no companywill will
be ‘too
be ‘too
big to
bigfail’
to fail’
- which
- which
couldcould
create
create
a a
crisiscrisis
deeperdeeper
thanthan
any of
anyusofhave
us have
seen”.
seen”.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 11


C S F I / New York CSFI

There
There
is aisreason,
a reason,
of course,
of course,
for for
the the
politicisation
politicisation
of banking:
of banking:
the the
needneed
to rescue
to rescue
banks
banks
in the
in the
firstfirst
place.
place.
ThisThis
willwill
leave
leave
a political
a political
legacy
legacy
no matter
no matter
howhow
the the
crisis
crisis
runsruns
its its
course.
course.
Many Many
respondents
respondentssaidsaid
thatthat
banks
banks
would
wouldhavehave
to repair
to repairtheirtheir
relations
relations
withwith
governments
governmentsandand
the the
public
public
if they
if they
wanted
wanted
to expunge
to expunge
political
political
risk.risk.

HereHere
is a is
selection
a selection
of comments
of comments
on this
on this
theme.
theme.

“Banks
“Banks
justjust
don’t
don’t
get get
howhow
unpopular
unpopular
theythey
are are
andand
howhow
much
much
has has
to to
change.” – Former
change.” – Former
regulator.
regulator.
A legacy
A legacy
of of
mistrust
mistrust “The“The
banksbanks
stillstill
fail fail
to realise
to realise
the the
depth
depth
of public
of public
anger
anger
against
against
them.them.
As aAs a
result,
result,
theirtheir
behaviour
behaviourseems
seems
to have
to have
changed
changed
not not
at all.
at all.
TheThe
result
result
is likely
is likely
to be
to abeperiod
a periodof tension
of tension
between
betweenbanks
banks
andand
regulators,
regulators,
which
which
meansmeansthatthat
banks
banks
concentrate
concentrate on politics
on politics
to the
to the
detriment
detriment
of their
of their
ordinary
ordinary
banking
banking
business.” – City
business.” – City
lawyer.
lawyer.

“The“The
financial
financial
sector
sector
as aaslobby
a lobby
group
group
is not
is not
aligned
aligned
withwith
the the
interests
interests
of of
the the
realreal
economy
economy
or the
or the
taxpayer.” – City
taxpayer.” – City
trader.
trader.

“We“We
needneed
to get
to get
backback
to business
to business
without
without
government
government
support.” – UK
support.” – UK
bankbank
chairman.
chairman.

2.2.
Credit
Credit
risk
risk
(2)(2)
TheThe
riskrisk
of large
of large
credit
credit
losses
losses
remains
remains
a top-level
a top-level
Banana
Banana SkinSkin
because
because
of fears
of fears
thatthat
thatthat
banks
banks
havehave
not not
got got
to the
to the
bottom
bottom
of their
of their
existing
existing
theirtheir
badbad
debts,
debts,
andand
because
because
loanloan
problems
problemsalways
always
lag lag
the the
recovery
recovery
andand
couldcould
stillstill
increase.
increase.
ThisThis
waswas
the the
No.No.
1 1
riskrisk
for for
regulators.
regulators.
Bankers
Bankers
andand
observers
observers
put put
it atitNo.
at No.
3. Geographically,
3. Geographically,the the
riskrisk
waswas
seenseen
to be
tomost
be most
severe
severe
in the
in the
AsiaAsia
Pacific
Pacific
region
region
because
becauseof asset
of asset
bubbles.
bubbles.

ManyManyrespondents
respondents
felt felt
thatthat
the the
worstworst
waswasyet yet
to come.
to come.
US US
bankbankanalyst
analyst
RayRay
Soifer
Soifer
said:said:
“The“The
economy
economyis notis not
yet yet
out out
of the
of the
woods,
woods,
andand
credit
credit
losses
losses
are are
a lagging
a lagging
TheTheworst
worst
yetyet indicator.
indicator.
I doI not
do not
believe
believe
thatthat
theythey
havehave
peaked.”
peaked.”
Chris
Chris
Pettit,
Pettit,
headheadof strategy
of strategy
at at
to to
come
come the the
Royal
Royal
BankBank
of Scotland,
of Scotland, saidsaid
thatthat
“the“the
economic
economicoutlook
outlook
stillstill
lookslooks
miserable;
miserable;
onon credit?
credit? credit
credit
riskrisk
remains
remains
high,”
high,”
while
while
fromfrom
Ireland,
Ireland,
a respondent
a respondent
wrote:wrote:
“A “Arealreal
concern
concern
would
would
be the
be the
impact
impact
on bank
on bank
balance
balance
sheets
sheets
of aof‘double
a ‘double
dip’dip’
in the
in the
euro/worldwide
euro/worldwide
economies.”
economies.”

Concerns
Concernsfocused
focused
particularly on real
particularly on realestate,
estate,
commercial
commercial as well
as well
as domestic.
as domestic. A A
respondent
respondentfromfrom the the
US US saidsaid
thatthat
rising
rising
unemployment
unemployment waswasa harbinger
a harbinger of of
potentially
potentially
hugehuge
losses
losses
on property
on propertylending.
lending.
A Nordic
A Nordicregulator
regulator
saidsaid
thatthat
“companies
“companies
are are
onlyonly
surviving
survivingduedueto low
to low
interest
interest
rates”.
rates”.
On Onthe the
home
homeloanloan
front,
front,
several
several
respondents
respondentscouldcould
see see
banks
banks
facing
facinga dilemma
a dilemma as borrowers
as borrowers defaulted
defaultedon ontheirtheir
mortgages,
mortgages,but but
the thepolitical
political
climate
climate mademadeit hard
it hard
for for
themthem
to foreclose.
to foreclose.Adrian
Adrian
Coles,
Coles,
director-general
director-general of the
of the
UK’s UK’sBuilding
BuildingSocieties
Societies
Association,
Association,sawsawa squeeze
a squeeze
between
between
“rising
“rising
unemployment
unemployment in 2010,
in 2010,andanda diminishing
a diminishing ability
ability
on the
on the
partpart
of of
mortgage
mortgage
lenders
lenders
to exercise
to exercise
significant
significant
forbearance
forbearancepolicies”.
policies”.

Another
Another
areaarea
of concern is consumer
of concern is consumercredit
credit
– credit
– credit
cardscards
andand
car car
loans
loans
– where
– where
bankers
bankers
saidsaid
thatthat
badbad
debts
debts
“had“had
not not
bottomed
bottomed
out out
yet”.yet”.
ThereThere
is also
is also
the the
question
question
of of
leverage:
leverage:
pastpast
deals
deals
builtbuilt
on large
on large
amounts
amountsof debt
of debt
which
whichinvestors
investors
cannot
cannot
nownow
service.
service.
A UKA UK regulator
regulator
sawsaw“continuing
“continuing
economic
economic weakness
weaknessaffecting
affecting
highly
highly
leveraged
leveraged
borrowers,
borrowers,
particularly
particularly
commercial
commercial
property
property
lending
lending
andand
leveraged
leveraged
buy-buy-
outs”.
outs”.

12 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

TheThe otherother
major
major areaareaof concern
of concern is is
assetasset
valuation:
valuation:are are
banksbanks
on on of of A subtle
top top A subtle beast beast
theirtheir
exposures,
exposures,andand havehave
theythey
valued
valued
them them
realistically?
realistically?
Many Manyrespondents
respondents Credit Credit
risk risk
is a iscomplex
a complexandand
subtle
subtle
felt felt
the the
answer
answerto both
to bothquestions
questions
waswas beast. beast.
EvenEven
if theif upturn
the upturn
continues
continues
no. no.
Richard
Richard
Farrant,
Farrant,chairman
chairmanof the
of the it willit manifest
will manifestitselfitself
in a in
number
a number
of of
auditaudit
committee
committee of Daiwa
of Daiwa Securities, different
Securities, different
ways. ways.
Europe,
Europe, saidsaid
thatthat “while
“whilemark-to-
mark-to-
market
marketmeansmeans thatthat banks'
banks' trading UK banking
trading UK bankingconsultant
consultant
portfolios
portfoliosare areprobably
probablyreasonably
reasonably
realistically
realistically
valued,
valued,I am I am
muchmuchmore more
sceptical
sceptical
thatthat
theirtheir
loanloan books
books
are,are,
andand
thatthat
couldcould
wellwell
become
become a source
a source
of pressure
of pressureif the
if the
raterate
of economic
of economic recovery
recovery
diminishes
diminishes
or stalls”.
or stalls”.
Peter
Peter
Moffatt
Moffatt of the
of the
Guernsey
Guernsey Financial
Financial Services
Services Commission
Commission waswas
concerned
concernedabout
about
“unexpected
“unexpected lossloss
duedueto mispricing/misunderstanding
to mispricing/misunderstanding of assets
of assets
on on
banks’
banks’
balance
balance
sheets
sheets
(or clients’
(or clients’
balance
balancesheets)”.
sheets)”.

Geographically,
Geographically, a respondent
a respondentfromfrom
a major
a major
banking
banking
trade
trade
association
association
saidsaid
thisthis
waswas a a
particular
particular
issue
issue
in the
in the
eurozone
eurozone
where,
where,
unlike
unlike
the the
US USandand
the the
UK,UK,banks
banks
tendtend
to use
to use
lessless
mark mark
to market
to marketaccounting.
accounting.
“Failure
“Failure
to admit
to admitthe the
extent
extent
of the
of the
write-downs
write-downs thatthat
are are
necessary
necessary
willwill
prolong
prolong
the the
period
period
of instability
of instability
in both
in both
the the
system
system
andand
for for
some some
individual
individualeurozone
eurozone banks”.
banks”.A respondent
A respondent fromfroma Middle
a Middle EastEast
bankbank
saidsaid
thatthat
“European
“European banks,
banks,
Middle
MiddleEastern
Eastern
banks
banks
andandin particular
in particular
DubaiDubai
banks
banks
are are
in denial
in denial
about
about
theirtheir
exposures,
exposures, which
which
could
could
veryvery
wellwell
set back
set back
Europe
Europeandand
the the
Middle
MiddleEastEast
for about
for about
fivefive
years”.
years”.

3.3.
Too
Too
much
much
regulation
regulation
(8)(8)
TheThe
torrent
torrent
of new
of new
regulation
regulation
beingbeing
proposed
proposed
in the
in the
wake wake
of the
of the
crisis,
crisis,
however
however
wellwell
intentioned,
intentioned,
is seen
is seen
as potentially
as potentiallyweakening
weakening the thebanking
banking
industry
industry
rather
rather
thanthan
strengthening
strengthening
it. Many
it. Many
respondents
respondentsdescribed
described
it asitaasdangerous
a dangerous
over-reaction
over-reaction
which
which
could
could
endend
up damaging
up damaging not not
justjust
the the
banks
banks
but but
the the
widerwider
economy.
economy.

Excessive
Excessive ThisThis
concern
concern
waswas
particularly
particularly
strong
strong
among
amongbankers,
bankers,
whowho ranked
ranked
it No.
it No.
2, but
2, but
alsoalso
among
amongobservers
observers
of the
of the
banking
banking
industry
industry
whowhoput put
it atit No.
at No.4. Regulators
4. Regulators tooktook
a a
regulation
regulation
may
may different
different
view:
view:
theythey
thought
thought
the the
problem
problemwaswastoo too
littlelittle
rather
rather
thanthantoo too
much much
weaken
weakenrather
rather regulation.
regulation.
All All
geographical
geographicalregions
regions
gavegave
thisthis
Banana
Banana
SkinSkina high
a high
score:
score:
it came
it came
top top
than
than
strengthen
strengthen in Asia
in Asia
Pacific.
Pacific.

thethe
banks
banks Respondents
Respondentsgavegavemanymanyreasons
reasons
for for
theirtheir
concerns
concerns
aboutabout
regulation.
regulation.
Chief Chief
amongamong
themthem
waswas
thatthat
the the
regulatory
regulatory
crackdown
crackdown waswaspolitically
politically
drivendriven
andandtherefore
therefore
likely
likely
to be
to be
overdone.
overdone. TheThechairman
chairmanof aof large
a largeUKUK bankbank waswas saidsaid
his hisworry
worry waswas
“overbearing
“overbearingregulation
regulationwhich
which
is not
is not proportionate
proportionate or of or aof level
a level
playing
playing fieldfield
character”.
character”.
Many Manyrespondents
respondents mademadethe thepoint
point
thatthat
the the
riskrisk
lay lay
in politicians
in politicians andand
regulators
regulators
going
going quantity
for for quantityrather
rather thanthan
quality.
quality.
TheThe chief
chief
auditor
auditor
of aoflarge
a large
Canadian
Canadian
bankbanksaidsaid
regulators
regulators
tooktook
the the
viewviewthatthat
“more
“morework work
equalsequals
more more
control,
control,
whenwhen
theythey
needneed
intelligent
intelligent
risk-based
risk-basedregulation”.
regulation”.
A particular
A particularconcern
concern
for European
for European
respondents
respondents
waswas the the
EU’s EU’s
response,
response, whichwhichwaswas
likely
likely
to be
to particularly
be particularly heavy-
heavy-
handed
handed
andand
politically
politically
driven.
driven.
Sonja
Sonja
Lohse,Lohse,
headheadof group
of groupcompliance
compliance at Nordea
at Nordeain in
Sweden,
Sweden,saidsaid
thatthat
the the
EU’sEU’snewnew regulatory
regulatoryproposals
proposals hadhadnot notbeenbeenproperly
properly
evaluated,
evaluated,
andand
couldcould
“squeeze
“squeeze
out out
flexibility
flexibility
fromfrom
the the
markets”
markets”andanddamage
damagethe the
fewfew
banks
banks
which
which
hadhadmanaged
managedto make
to make
it through
it through
the the
crisis
crisis
unscathed.
unscathed.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 13


C S F I / New York CSFI

There
There
waswasalsoalso
the the
fearfear
thatthat
regulation
regulation
would stifle
would stifle
the the
recovery
recoveryby loading
by loading
the the
banks
banks
withwith
expensive
expensive
capital
capital
andand
liquidity
liquidity
rules.
rules.
JohnJohn
Hitchins,
Hitchins,
UKUK banking
banking
leader
leader
at PricewaterhouseCoopers,
at PricewaterhouseCoopers, saidsaid
thatthat
“the“the
cumulative
cumulative effect
effect
of all
of the
all the
regulatory
regulatory
initiatives
initiatives
couldcould
havehave
an inadvertent
an inadvertentpermanently
permanently damaging
damagingeffect
effect
on the
on the
industry’s
industry’s
profitability”.
profitability”.
TheThe
chief
chief
riskrisk
officer
officer
of aoflarge
a large
German
German bankbank
warned
warnedthatthat
pressure
pressure
fromfrom
politicians
politicians
andand
regulators
regulators
“could
“could
leadlead
to overregulation
to overregulation of banks.
of banks.ThisThis
maymay
Too
Too
much
much reduce
reduce
banks’
banks’
willingness
willingness
to take
to take
further
further
risks,
risks,
andand
couldcould
leadlead
in turn
in turn
to atofurther
a further
contraction
contraction
of the
of the
economy”.
economy”.
regulation
regulation
could
could
stifle
stifle
thethe TheThe
sheer volume
sheer volumeof new
of newregulation
regulation
waswasalsoalso
a concern,
a concern,
fromfrom
the the
point
point
of view
of view
of of
costcost
andand
management
management distraction.
distraction.
Michael
Michael
McKee,
McKee, a partner
a partner
at law
at law
firmfirm
DLA DLAPiper
Piper
recovery
recovery saidsaid
thatthat
“there
“there
has has
to beto abelimit
a limit
to how
to howmuchmuchchange
change
a financial
a financialinstitution
institution
can can
safely
safely
taketake
on board
on boardat one
at one
time”.
time”.
Tougher
Tougherregulation
regulation
maymayalsoalso unintended
havehave unintended
consequences.
consequences.TheThehigher
higher
costscosts
willwill
havehave
to be
to passed
be passed
on toonconsumers,
to consumers, whichwhich
willwill
be unpopular.
be unpopular.
TheThe
impact
impact
on profitability
on profitability
could
could
alsoalso
spurspur
banks
banks
to take
to take
moremore
riskrisk
or or
abscond
abscond
to more
to more
lightly
lightly
regulated
regulatedcentres.
centres.

TheThe
riskrisk
of excessive
of excessiveregulation
regulation
waswasNo.No.
1 in1the AsiaAsia
in the Pacific
Pacific
region.
region.
In Australia,
In Australia,
GaryGaryDingley,
Dingley,
chief
chief
operational
operationalriskrisk
officer
officer
of the
of the
Commonwealth
Commonwealth Bank,
Bank,
sawsaw
the the
riskrisk
of aofregulatory
a regulatoryoverreaction
overreaction“without
“withoutthe the
necessary
necessaryreview,
review,
consultation
consultationandand
analysis
analysis
of overall
of overall
impactimpact
on the
on the
individual
individual
banksbanks
or the
or the
financial
financial
sectors”.
sectors”.
A banker
A banker
fromfrom
India
India
commented:
commented: “The “The
current
current
crisis
crisis
has has
led led
to all
to types
all types
of banks
of banks
failing,
failing,
large
large
small,
small,
investment,
investment, retail,
retail,
the the
works.
works.
Largely
Largelythe the
common
common denominator
denominator is poor
is poor
liquidity
liquidity
management.
management. As we
As come
we comeout out
of this
of this
crisis
crisis
the the
main main
threat
threat
to safety
to safety
willwill
be be
over-reaction
over-reactionfromfrom
regulators
regulatorswhich
which
leads
leads
to atotoo
a too
costly
costly
system
systemandand
unsustainable
unsustainable
business
business
models.”
models.”

Regulators
Regulatorswerewere
not,not,
however,
however,blind
blind
to these
to these
dangers.
dangers.
Michael
MichaelLesser,
Lesser,
managing
managing
director
director
of supervision
of supervision
andand
authorisation
authorisationin Qatar,
in Qatar,
wrote:
wrote:
“Regulators
“Regulators
(and(and
I amI am
one)one)
needneed
to be
to careful
be careful
about
about
howhow
newnewrulesrules
are are
written,
written,
to avoid
to avoid
either
either
overly
overly
restricting
restricting
the the
ability
ability
of of
banks
banks
to to
do dobusiness
business or or
by byrestricting
restricting
some
somebusiness
businesslines,
lines,
inadvertently
inadvertently
encouraging
encouraging
firms
firms
to get
to get
involved
involved
in other,
in other,
lessless
restricted,
restricted,
but but
riskier
riskier
business.”
business.”

4.4.
Macro-economic
Macro-economic
trends
trends
(5)(5)
TheThe
economic
economic
outlook
outlook
remains
remains
extremely
extremely
uncertain,
uncertain,
pushing
pushing
thisthis
Banana
BananaSkinSkin
up aup a
notch.
notch.
Most
Most
of our
of our
respondents
respondents
sounded
sounded
veryvery
pessimistic.
pessimistic.
For For
many,
many,
the the
danger
danger
is is
not not
simply
simply
thatthat
therethere
willwill
be abe“double
a “double
dip”dip”
recession,
recession,
but but
thatthat
bankers
bankers
willwill
be be
Fears
Fears
of of
a a unprepared
unprepared
for it.
for it.
‘double
‘double
dip’
dip’
recession
recession Broadly,
Broadly,
non-bankers
non-bankers seem seem
to beto more
be more pessimistic
pessimistic
thanthan
bankers
bankers 2 versus
(No.(No. 2 versus
No.No.
6), and
6), and
AsiaAsia
Pacific
Pacific
(No.(No.
2) more
2) morepessimistic
pessimistic thanthan
either
either
Europe
Europe
(No.(No.
3) or3) North
or North
America
America
(No.(No.
5). If
5).there
If there
is a isconsensus,
a consensus,it isitthat
is that
the the
current
current
recovery
recovery
is very
is very
weak,
weak,
sustained
sustained
onlyonly
by low
by lowinterest
interest
ratesrates
andand
massive
massivefiscal
fiscal
andand
monetary
monetarysupport.
support.
It isIt is
alsoalso
vulnerable
vulnerable
to atoreversal
a reversalcaused
caused
by fresh
by freshproblems
problems
on the
on the
banking
banking
front:
front:
a surge
a surge
in bad
in bad
debts,
debts,
a continuing
a continuing shortage
shortageof credit,
of credit,mounting
mountingpressures
pressures
on government
on government
resources,
resources,
andand
wavering
wavering investor
investor
confidence.
confidence. TheThequestion
question
is whether
is whetherthe the
global
global
economy
economywillwill
somehow
somehow struggle
struggle
on, on,
suffer
suffer
a setback,
a setback,
or even
or even
collapse
collapse
intointo
deflation.
deflation.

TheThechief
chief
investment
investment
officer
officer
at aatlarge
a large
UKUK investment
investment
group
group
said:said:
“I believe
“I believe
the the
actions
actions
of the
of the
authorities
authorities
to guarantee
to guaranteedepositors
depositors
havehave
significantly
significantly
reduced
reduced
the the
likelihood
likelihood
of aofsystemic
a systemic
widewide
collapse.
collapse.
However,
However,the the
possibility
possibility
of aof‘W’a ‘W’
pathpath
for for
the the
economy
economywithwith
a further
a further
leg leg
downdown
in 2010
in 2010
remains
remains
significant.
significant.
While
While
not not
our our

14 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

central
central
scenario,
scenario,
suchsuch
an outcome
an outcome couldcould
put severe
put severe
further
further
pressure
pressure
on asset
on asset
prices
prices
and would
and would
clearly
clearly
lead lead
to a to
higher
a higher
levellevel
of defaults”.
of defaults”.
Elbert
Elbert
Pattijn,
Pattijn,
chiefchief
risk risk
officer
officer
at DBS
at DBS
BankBankin Singapore,
in Singapore,
saw saw
the main
the main
risksrisks
as “double
as “double
dip indipterms
in terms
of global
of global
GDP,GDP,
leading
leading
to high
to high
inflation
inflation
and and
interest
interest
ratesrates
that that
wouldwould
impactimpact
property
property
values
values
and and
the ability
the ability
of property
of property
owners
owners
to service
to service
theirtheir
floating
floating
rate rate
loans”.
loans”.
A London
A London
economist
economist
wondered
wondered whether
whether
governments
governments wouldwould
be able
be able
to fine
to fine
tunetune
policy
policy
sufficiently
sufficiently
to navigate
to navigate
between
between
“the “the
Scylla
Scylla
of inflation
of inflation
and and
the Charybdis
the Charybdis of aof a
double
double
dip recession”.
dip recession”.Russian
Russian
respondents
respondentswerewere
specially
specially
gloomy.
gloomy.
A senior
A senior
bankbank
economist
economist
said said
that that
“significant
“significant
creditcredit
risksrisks
are generated
are generated
by the
byoverall
the overall
instability
instability
in in
the economy,
the economy,and aandworsening
a worsening
of theofbusiness
the business
climate”.
climate”.

A new
A new
‘asset
‘asset Many Many
respondents
respondentsfelt that
felt that
government
governmentactions
actions
to pump
to pump
liquidity
liquidity
into into
the markets
the markets
bubble’
bubble’
onon
thethe had merely
had merelyinflated an “asset
inflated an “asset
bubble”
bubble”
whichwhich
wouldwould
eventually
eventually
burstburst
withwith
damaging
damaging
consequences,
consequences, as itasdidit in
did2007.
in 2007.
ThisThis
concern
concern
underlay
underlay
the high
the high
risk risk
that that
AsianAsian
way?
way? respondents
respondentsplaced
placed
on theon economic
the economicoutlook.
outlook.
The The
chiefchief
executive
executive
of a ofFara Eastern
Far Eastern
bankbank
said said
that that
liquidity
liquidity
“is being
“is being
poured
poured
mostlymostly
into into
'financial
'financial
assets'
assets'
suchsuch
as as
equities
equities
and and
real real
estate,
estate,
thus thus
creating
creating
a bubble
a bubble
economy.
economy.
MoreMoreneeds needs
to betodone
be done
to to
create
create
jobs jobs
and and
boostboost
credits
credits
and and
investment
investment
flowsflows
into into
productive
productive
industries”.
industries”.
The The
chiefchief
economist
economist at a at
large
a large
hedge hedge
fundfund
said said
that that
his main
his main
concern
concern
“is that
“is that
we get
we yet
get yet
another
another
assetasset
bubblebubble
developing
developing
and and
bursting…The
bursting…The excessexcess
liquidity
liquidity
in markets
in markets
meansmeans
that that
manymany assetasset
pricesprices
are already
are already
starting
starting
to look
to look
frothy”.
frothy”.

There
There
was was
also also
a concern
a concern
that that
the rally
the rally
had had
created
created
a false
a false
sensesense
of security,
of security,
and and
brought
brought
a return
a return
of complacency,
of complacency,eveneven
recklessness
recklessness
to thetofinancial
the financial
markets
markets
(see (see
box box
below).
below).
A respondent
A respondent
fromfrom
a large
a large
US bank
US bank
said said
that that
“risk“risk
is inadequately
is inadequately
calibrated
calibrated
against
against
an uncertain
an uncertain
economic
economic
recovery”.
recovery”.

TheThe
C word
C word
Complacency
Complacency
may maybe thebebiggest
the biggest
Banana
Banana
Skin Skin
of all.ofMany
all. Many
of our
ofrespondents
our respondents
werewere
alarmed
alarmed
by the
by“business
the “businessas usual”
as usual”
attitude
attitude
of banks
of banks
despite
despite
the huge
the huge
amount
amount
of of
workwork
that was
that still
wasneeded
still needed
to clear
to clear
up the
upmess
the mess
and stabilise
and stabilise
economies.
economies.
A UKA UK
investment
investment
manager
managersaw “the
saw “the
returnreturn
of hubris/over-confidence
of hubris/over-confidence and the
andold
theshort
old short
termterm
habits
habits
among among
investment
investment
banks,banks,
notably
notably
Wall Wall
Street Street
ones.”
ones.”
ApartApart
fromfrom
exposing
exposing
banksbanks
to the
torisk
the of
risk
a double
of a double
dip recession,
dip recession,
thesethese
attitudes
attitudes
also also
bodebodeill forillthe
forfuture.
the future.
TheyThey
implyimply
that the
thatlessons
the lessons
of the
ofcrisis
the crisis
may may
not be
not be
learnt.
learnt.
A regulator
A regulatorwondered
wondered
whether
whether
“changes
“changesin behaviour
in behaviour
will result,
will result,
or whether
or whether
therethere
will be
willa be
return
a return
to the
topractices
the practices
that led
thattoledthe
toproblems,
the problems,
or toornew,
to new,
but just
but just
as risky,
as risky,
behaviour.”
behaviour.”UK consultant
UK consultant
economist
economist
DavidDavidKernKern
saw “inadequate
saw “inadequate
changes
changes
in culture
in culture
and mentality
and mentality
withinwithin
the financial
the financial
system;
system;
an inability
an inability
or or
unwillingness
unwillingness to learn
to learn
fromfrom
the crisis,”
the crisis,”
and aandSwiss
a Swiss
bankerbanker
observed
observed
that “product
that “product
development
development goesgoes aheadahead
almostalmost
like before”.
like before”.
A respondent
A respondent
fromfrom
an Australian
an Australian
bankbank
said said
that “parts
that “parts
of Asia
of Asia
are improving
are improving
rapidly
rapidly
and some
and some
of theofissues
the issues
are again
are again
emerging.
emerging.
Pricing
Pricing
for risk
for is
risk
being
is being
eroded,
eroded,
the the
cost cost
of human
of human
resources
resources
is moving
is moving
up. The
up. governance
The governanceframework
framework
is more
is more
bureaucratic
bureaucratic
thanthan
addressing
addressing
risk”.risk”.
A belief
A belief
that the
thatcrisis
the crisis
is over
is over
may may
also also
sap the
sappolitical
the political
will towill
reform
to reform
the financial
the financial
system.
system.
The director
The director
of a US
of aproject
US project
on financial
on financial
reformreform
said:said:
“My main
“My main
worryworry
is that
is that
a good
a good
crisiscrisis
will have
will have
beenbeen
wasted.
wasted.
On Wall
On Wall
Street,
Street,
folk are
folkback
are back
doingdoing
business
business
as as
normal.
normal.
On Main
On Main
Street,
Street,
loansloans
aren'taren't
getting
getting
mademadeand aandbunch
a bunch
moremore
smaller
smaller
banksbanks
havehave
yet toyetgotobelly
go belly
up - which
up - which
they they
will. And
will. on
AndCapitol
on Capitol
Hill, there
Hill, there
is a real
is a real
danger
danger
we will
wegetwillsome
get some
symbolic
symbolic
moving moving
of deck
of deck
chairschairs
and nothing, nada,nada,
and nothing, in thein the
way of
way
steps
of steps
to reduce
to reduce
the chances
the chancesof another
of another
$15tr$15tr
dip indip
economic
in economicactivity.”
activity.”

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 15


C S F I / New York CSFI

5. 5.
Liquidity
Liquidity
(1)(1)
A critical
A critical
shortage
shortage
of liquidity
of liquidity
triggered
triggered
the credit
the credit
crunch
crunch
two two
yearsyears
ago, ago,
which
which
is is
why why
this this
BananaBanana
SkinSkinshot shot
to the
to top
the of
topour
of survey
our survey
last time.
last time.
It remains
It remains
high,high,
not not
because
because
liquidity
liquidity
is still
is still
suchsuch
an urgent
an urgent
problem,
problem,
but because
but because
new new
liquidity
liquidity
has been
has been
artificially
artificially
created
created
by central
by central
bankbank
actions
actions
suchsuch
as Quantitative
as Quantitative
Easing
Easing
(QE)(QE)
whichwhich
mustmust
comecome
to antoend
an at
end some
at some
point.
point.
ThenThen
what? what?

Liquidity
Liquidity
was was
a higha high
levellevel
concern
concern
for all
for respondent
all respondentcategories.
categories.
A Eurozone
A Eurozone
regulator
regulator
said:said:
“The“The
current
current
optimism
optimismon financial
on financial
markets
markets
is probably
is probably
overstated.
overstated.
Banks'
Banks'
liquidity
liquidity
and and
solvency
solvency
position
position
appears
appears
to betoless
be less
critical
critical
for the
for moment,
the moment,
but…liquidity
but…liquidityrisk risk
is still
is still
veryvery
muchmuch
an issue.
an issue.
The The
reopening
reopening
of short
of short
and long
and long
termterm
funding
funding
markets
markets
is fragile
is fragile
and and
somesome
firmsfirms
are still
are still
overly
overly
wholesale
wholesale
and and
shortshort
termterm
funded.”
funded.”
Another
Another
respondent
respondent
said said
that “QE
that “QE
creates
creates
an illusion
an illusion
whichwhich
will will
burst”.
burst”.

What
What
happens
happens The The
question
question
of when
of when
and and
howhow central
central
banksbanks
windwinddowndown
theirtheir
QE programmes
QE programmes is is
crucial.
crucial.
The The
finance
finance
director
director
of aofmajor
a major
international
international
banking
banking
groupgroup
saw saw
banksbanks
after
after suffering
suffering
fromfrom
“an excessive
“an excessive
reliance
reliance
on the
on huge
the huge
liquidity
liquidity
boostboost
that that
central
central
banksbanks
Quantitative
Quantitative havehave
injected”.
injected”.
A City
A City
of London
of London
economist
economist
said said
he feared
he feared
that that
“QE“QEwill will
end before
end before
banks
banks
havehave
beenbeen
forced
forced
to refinance”.
to refinance”.
Easing?
Easing?
NewNew
regulations
regulations
will will
require
require
banks banks
to keep
to keep
higher
higher
levels
levels
of liquidity
of liquidity
whichwhich
would
would
reduce
reduce
the scale
the scale
of this
of this
risk,risk,
thoughthough
somesome
respondents
respondents
feared
feared
this this
wouldwould
add add
to to
banks’
banks’
funding
funding
costs,costs,
and therefore
and therefore
the cost
the cost
of credit.
of credit.

Many Many
respondents
respondents
also also
mademade
the point
the point
that,that,
untiluntil
the credit
the credit
crunch
crunch
at least,
at least,
liquidity
liquidity
was was
not viewed
not viewed
as a as
higha high
risk risk
area.area.
Now,Now, things
things
are different,
are different,
and one
and one
of the
of issues
the issues
is whether
is whether
lessons
lessons
havehave
beenbeen
learnt.
learnt.
A German
A Germanbankbank
adviser
adviser
said said
that that
“if we
“if have
we have
learnt
learnt
something
something
fromfrom
the crisis,
the crisis,
it is itthat
is that
liquidity
liquidity
risk risk
needsneeds
to betoinbethe
in minds
the minds
of of
authorities,
authorities,
boards
boards
and and
seniorsenior
management”.
management”. A UK A UK bankbank
chairman
chairmandescribed
described
liquidity
liquidity
as “the
as “the
nextnext
problem
problem
to solve,
to solve,
post-central
post-central
bankbank
withdrawal”.
withdrawal”.

6. 6.
Capital
Capital
availability
availability
(-)(-)
BanksBanks
havehave
beenbeen
able able
to raise
to raise
impressive
impressive
amounts
amounts
of new
of new
capital
capital
in the
in wake
the wake
of the
of the
crisis.
crisis.
But But
can can
this this
continue?
continue?
WillWill
banksbanks
be able
be able
to meet
to meet
the the
tougher
tougher
capital
capital
requirements
requirements
that that
are on
arethe
onway,
the way,
and will
and will
theythey
be able
be able
to service
to service
them?them?

ThisThis
is a new
is a new
Banana
Banana
Skin:Skin:
shortages
shortages
of capital
of capital
for the
for banking
the banking
industry
industry
werewere
nevernever
a problem
a problem
in the
in boom
the boom
times.
times.
But But
theythey
couldcould
be now,
be now,
particularly
particularly
if hard
if hard
economic
economic
conditions
conditions
persist,
persist,
and the
andability/willingness
the ability/willingness
of governments
of governments
to support
to support
themthem
begins
begins
to fade.
to fade.
ThisThis
concern
concern
was was
strongest
strongest
in Europe.
in Europe.

Many Many
respondents
respondents
werewere
sceptical
sceptical
aboutabout
the adequacy
the adequacyof bank
of bank
capital,
capital,
eveneven
afterafter
the the
recentrecent
round
round
of capital-raising.
of capital-raising.
A City
A City
of London
of London
economist
economist
said:said:
“Banks
“Banks
havehave
too too
littlelittle
equity
equity
and and
bankers
bankers
(even(even
bankers!)
bankers!)
knowknowthis. this.
UntilUntil
theythey
are forced
are forced
to raise
to raise
largelarge
amounts,
amounts,
they they
will will
not lend.”
not lend.”

And And
compulsion
compulsion
is onisthe
onway.
the way.
NewNewrulesrules
will will
oblige
oblige
banksbanks
to hold
to hold
moremore
capital
capital
and and
contingency
contingency
funding,
funding,
and force
and force
themthem
to salt
to earnings
salt earnings
awayaway
in the
ingood
the good
timestimes
to help
to help
pay for
paythe
for bad.
the bad.
The The
headhead
of a of
European
a European
banking
banking
association
association
said:said:
“The“The
demands
demandsof of
the new
the new
Basel/EU
Basel/EU
requirements
requirements
are in
areexcess
in excess
of some
of some
banks’
banks’
ability
ability
to raise
to raise
the the
necessary
necessary
capital.
capital.
ThisThis
will will
meanmeanmoremore
of them
of them
having
having
to seek
to seek
government
governmentsupport,
support,

16 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

eg eg
some
some
Japanese
Japanese
banks,
banks,
somesome
eurozone
eurozone
banks,
banks,
the the
mutual
mutual
sector
sector
in the
in the
UK,UK,
Landesbanks
Landesbanks
in Germany,
in Germany,
the the
mutuals
mutuals
in France
in France
andand
Spain.”
Spain.”

Higher
Higher
capital
capital
requirements
requirements willwill
alsoalso
meanmean
higher
higher
costs
costs
for for
banks,
banks,
which
whichwillwill
put put
a a
strain
strain
on on
profitability,
profitability,
andand possibly
possibly
create
create
incentives
incentives
to take
to take
on on
newnew risks.
risks.
TheThe
director
director
of group
of group
riskrisk
at aatUKa UK
merchant
merchant
bankbanksaidsaid
thatthat
“higher
“higher
capital
capital
requirements
requirements
andand
lower
lower
returns
returns
increase
increase
the the
relative
relative
attractions
attractions
of trading
of trading
activities…”
activities…” while
while
a a
respondent
respondentfromfroma Japanese
a Japanese bankbanksaidsaid
thatthat
“as “as
memories
memories fade,
fade,
therethere
willwill
be be
Higher
Highercapital
capital significant
significant
pressure
pressurefromfromshareholders
shareholdersto boost
to boostreturns,
returns,
which
whichwillwill
leadlead
to banks
to banks
taking
taking
unacceptable
unacceptable risksrisks
again”.
again”.
OneOnebanker
bankersummed
summedup the
up the
paradox:
paradox:
“Regulation
“Regulation
requirements
requirements willwill
increase
increase
demand
demand for for
capital,
capital,
whereas
whereasdecreased
decreased
bankbank
profitability
profitability
willwill
reduce
reduce
maymaypush
push banks
banks the the
supply
supply
of capital.”
of capital.”
to to
take
take
SomeSome
banking
banking
respondents
respondents
felt felt
thatthat
higher
higher
capital
capital
requirements
requirementswerewere
unwarranted,
unwarranted,
greater
greaterrisks
risks given
given
the the
work
work
thatthat
banks
banks
wereweredoing
doing
to clean
to clean
up up
theirtheir
balance
balance
sheets
sheets
andand
de- de-
leverage.
leverage.
TheThe
headhead
of government
of government relations
relations
at aatlarge
a large
international
international
banking
banking
group
group
saidsaid
thisthis
waswas
“a key
“a key
issue,
issue,
but but
driven
driven
by political
by political
andandmisinformed
misinformedagendas”.
agendas”.

It’sIt’s
notnot
all all
bad bad
A number
A number
of respondents
of respondents saidsaid
there
there
waswastoo much
too muchpessimism
pessimism
around,
around,
andand
thatthat
we we
werewere
in danger
in danger
of talking
of talking
ourselves
ourselves
intointo
another
another
crisis.
crisis.
The The
chiefchief
executive
executive
of aof a
London-based
London-basedbankbank
saidsaid
emphatically:
emphatically:
“I think
“I think
the global
the global
banking
banking
system
system
andand
all all
major
major
national
national
banking
banking
markets
markets
are are
sound.
sound.
Therefore
Therefore
I have
I have
no concerns
no concerns
about
about
ongoing
ongoing
systemic
systemic
risk.”
risk.”

Another
Another
respondent
respondent saidsaid
thatthat
an overly
an overly
pessimistic
pessimistic
outlook
outlook
would
would
result
result
in in
“regulators
“regulators
setting
setting
too much
too much
storestore
by stress
by stress
teststests
which
which
turnturn
out to
outbe
totoo
be severe.
too severe.
ThisThis
constrains
constrains
growth,
growth,
andand
forces
forces
failures
failures
or consolidation
or consolidation
which
which
needneed
not have
not have
happened…
happened…It also
It also
leads
leads
to pessimism
to pessimism amongst
amongstrating
rating
agencies
agencies
whowho
adoptadopt
an ultra
an ultra
cautious
cautious
approach
approachwhich
which
restricts
restricts
access
access
to wholesale
to wholesale
funding.”
funding.”

Susan
Susan
Rice,Rice,
managing
managing director
director
of Lloyds
of Lloyds
Banking
Banking
Group Group
Scotland,
Scotland,
saidsaid
thatthat
while
while
there
there
werewere
still still
risks,risks,
“financial
“financial
institutions
institutions
andand
the the
financial
financial
system
system
as aaswhole
a whole
are are
far safer
far safer
thanthan
a yeara year
ago.ago.
ThisThis
is due
is due
to lessons
to lessons
learned,
learned,
public
public
andand
regulatory
regulatory
scrutiny,
scrutiny,
regulatory
regulatory reformation,
reformation,
economic
economicfactors,
factors,
the new
the new
Banking
Banking
Act and
Act and
other
other
factors.”
factors.”

7.7.
Derivatives
Derivatives
(4)(4)
ThisThis
is the
is the
lowest
lowest
position
position
thatthat
derivatives
derivatives
havehave
occupied
occupied
in the
in the
Banana
Banana
Skins
Skins
tabletable
since
since
2000 2000
when when
theythey
werewere
viewed
viewed
as an
asup-and-coming
an up-and-coming risk.risk.
Is this
Is this
a sign
a sign
thatthat
theythey
havehave
lostlost
theirtheir
sting,
sting,
or that
or that
people
people
havehave
got got
usedused
to them?
to them?Interestingly,
Interestingly,
bankers
bankers
ranked
ranked
thisthis
riskrisk
much much
higher
higher
(No.(No.
5) than
5) than
non-bankers
non-bankers
(No.(No.
11) 11)
andand
eveneven
regulators
regulators
(No.(No.
13).13).
ThisThis
reverses
reverses
the the
usual
usual
position,
position,
andand
maymay
be connected
be connected withwith
bankers’
bankers’
pre-pre-
occupations
occupations withwith
credit
credit
derivatives.
derivatives.

TheTherisksrisks
in derivatives
in derivatives are are
stillstill
seenseento lie
to lie
in their
in their
complexity,
complexity,andand a poor
a poor
understanding
understanding of the
of the
exposures
exposurestheytheycreate.
create.
OneOne respondent
respondentsaidsaid
theythey
remained
remained
“weapons
“weapons of mass
of massdestruction”.
destruction”.Consultant
Consultant Andrew
Andrew LeungLeung
saidsaid
that,that,
in the
in the
nearnear
future,
future,
“the“the
riskrisk
is that
is that
the the
depth
depth
of toxic
of toxic
debtdebt
remains
remains
largely
largely
hidden
hidden
underunder
the the
carpet,
carpet,
especially
especially
withwith
commodities
commodities andand foreign
foreign
exchange
exchangederivatives
derivatives
andandcredit
credit
default
default
swaps”.
swaps”.
Some Somerespondents
respondents thought
thought
thatthat
thisthis
riskrisk
would
wouldgrow grow
as banks
as banks

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 17


C S F I / New York CSFI

developed
developed everever
moremore
innovative
innovativeinstruments
instruments
to deal
to deal
withwith
tougher
tougher
regulation
regulation
andand
squeeze
squeeze
higher
higher
margins
margins
out out
of aoflow
a low
yield
yield
environment.
environment.Giles
Giles
Vardey,
Vardey,
consultant
consultant
to to
institutional
institutional
fundfund
managers
managers Babson
BabsonCapital
Capital
Europe,
Europe,
saidsaid
thatthat
“any“any
significant
significant
'tightening'
'tightening'
of banking
of banking
regulations
regulationswillwill
onlyonly
serve
serve
to create
to create
newnewwaysways
to circumvent
to circumvent
these
these
rulesrules
andand
thusthus
create
create
eveneven
more more
exotic
exotic
products”.
products”.

ButBut
others
others
felt felt
there
there
werewere
reasons
reasons
to feel
to feel
moremore
relaxed
relaxed
about
about
the the
dangers
dangers
of of
derivatives.
derivatives.
OneOnesaidsaid
thatthat
“simplification,
“simplification,
reduced
reduced
volumes
volumes
andand
better
better
transparency
transparency
havehave
mademade
thisthis
market
market
safer”.
safer”.
Worries
Worriesabout
about
derivatives
derivatives
areare Others
Others pointed
pointed
out out
thatthat
newnewregulations
regulationswillwillforce
force
Over-the-Counter
Over-the-Counter derivative
derivative
trading
trading
on toonthe
to the
openopen
exchanges
exchangeswhere
where
it can
it can
be better
be better
monitored
monitored
andandcontrolled.
controlled.
A A
easing
easing UKUK investment
investment manager
managersaidsaid
thatthat
“the“the
move move to an
to an
exchange-traded
exchange-traded basis
basis
willwill
probably
probably taketake
at least
at least
three
three
years.
years.
Whilst
Whilst
some some
of the
of the
work work
being
being
donedone
willwill
reduce
reduce
risksrisks
through
through
standardisation,
standardisation,
the the
resulting
resulting
fragmentation
fragmentationbetween
betweenassetasset
classes
classes
andand
regulatory
regulatoryenvironments
environments maymay
adversely
adversely
impact
impactthe the
banks’
banks’
client
client
base”.
base”.

8.8.
Risk
Risk
management
management
quality
quality
(6)(6)
ThatThat
riskrisk
management
management in banks
in banksleaves
leaves
muchmuch
to be
to desired
be desired
is obvious,
is obvious,
andandthe the
bankers
bankers
among
among
our our
respondents
respondentsranked
ranked
thisthis
Banana
Banana
SkinSkin
almost
almost
as highly
as highly
as non-
as non-
bankers.
bankers.
“This
“This
is the
is the
key,”key,”
saidsaid
oneone
banker.
banker.
“I don't
“I don't
think
think
anyone
anyone
can can
say say
thatthat
it does
it does
not not
needneed
improvement
improvement andandattention.”
attention.”

ButBut
whatwhat
are are
the the
issues?
issues?

Respondents
Respondents identified
identified
a string
a string
of failings,
of failings,
including
includingan excessive
an excessive focusfocus
on short-
on short-
termterm
results,
results,
inadequate
inadequate
skills,
skills,
a lack
a lack
of rigour,
of rigour,
poorpoorunderstanding
understanding of newfangled
of newfangled
instruments,
instruments, overdependence
overdependence on on box-box-
ticking
tickingandandmodels,models,a afailure
failureto to
appreciate
appreciatethatthat
riskrisk
management
management is not a a Is banking
is not Is banking eveneven a a
costcost
but but
a source
a sourceof of
value
value “A “A profession?
etc..etc.. profession?
properly
properly
managed
managedbusiness
business
should
should
be onbe on
top top
of of risks,”
risks,”saidsaid
Henry
Henry Angest, The The
Angest, concept
concept
of banking
of bankingas 'aas 'a
Chairman/CEO
Chairman/CEO of Arbuthnot
of Arbuthnot Banking
Banking profession'
profession'
has has
taken
taken
a hammering
a hammering
in the
in past
the past
10 years
10 years
withwith
apologists
apologists
Group.
Group. arguing
arguing
thatthat
there
there
is noisneed
no need
for for
specific
specific
banking
banking
qualifications
qualifications
or or
TheThequestion
question
is whether
is whether banks
banks
havehave learning.
learning.
It is Itenough,
is enough,
theythey
say,say,
to to
learnt
learnt
lessons
lessons
fromfrom
the the
crisis
crisis
andand
taken
taken havehave
an 'appropriate'
an 'appropriate' qualification
qualification
steps
steps
to correct
to correct
these
these
failings.
failings. without
without
makingmakingclearclear
whatwhat
thatthat
means.
means.
No other
No other
'profession'
'profession'
is sois so
A A tonetone of ofscepticism
scepticismpervaded
pervaded the the cavalier cavalier
in itsinrequirement
its requirement
for for
practitioners
practitionersto have
to have
proper
proper
andand
responses
responses here.
here.
OneOne respondent
respondent feared
feared
relevant
relevant
skillsskills
andand
knowledge.
knowledge.
thatthat“board
“boardmembers
membersandandsenior senior
managers
managers maymay not not
havehavelearnt
learnt
the the Principal,Principal,
professional
professional
institute
institute
lessons
lessons
of the
of the
recent
recent
crisis
crisis
andandthatthat
theirtheir
banks
bankscontinue
continueto take
to take
risksrisks
on on
theirtheir
booksbooksthatthat
theythey don'tdon't
understand”.
understand”.TheThe
managing
managing director
director
of product
of product
control
control
at aatSwiss
a Swissbankbank
worried
worried thatthat
banks
banks
would
would
“fail“fail
to properly
to properlyandandrigorously
rigorously
embedembednewnew control
controlprocesses
processes andand cultures
cultures
arising
arising
fromfrom
the the
lessons
lessons
learned
learned
during
during
the the
crisis,
crisis,
andand return
return
to the
to thecomplacency
complacency thatthat
existed
existed
before
before
the the
crisis”.
crisis”.
SomeSomerespondents
respondentsevenevenfelt felt
the the
risksriskswouldwould
get get
worseworse
in the
in the
difficult
difficult
period
period
aheadahead
as banks
as banksstruggled
struggledto make
to make profits
profitsandand werewere
tempted
tempted
to cut
to cut
corners
cornerson risk
on risk
management.
management. Stewart
Stewart
Fleming,
Fleming, research
researchvisitor
visitor
London
LondonSchool
Schoolof of
Economics,
Economics, waswasconcerned
concernedabout about
“the“the
threat
threat
of excessive
of excessive speculation
speculationby financial
by financial

18 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

institutions,
institutions,
driven
driven
not not
onlyonly
by extremely
by extremely
lowlow
(too(too
low)low)
interest
interest
ratesrates
andand
monetary
monetary
easing,
easing,
but but
alsoalso
by bypressures
pressures
to build
to build
up upprofitability
profitability
as quickly
as quicklyas possible
as possible
to to
strengthen
strengthen
capital,
capital,
copecope
withwith
cyclical
cyclical
losses
losses
andand
raiseraise
newnew
equity”.
equity”.

ManyManyrespondents
respondents commented
commented on the
on the
needneed
not not
justjust
for for
stronger
stronger
controls
controls
but but
for for
a a
change
change
in culture
in culture to include
to include
a more
a more
positive
positive
attitude
attitude
towards
towards
riskrisk
management.
management.A A
Canadian
Canadianconsultant
consultant saidsaid
thatthat
“there
“there
are are
fewfew
really
really
good good
riskrisk
managers.
managers.
Many
Manysuffer
suffer
fromfrom
too too
littlelittle
independence
independence or authority,
or authority,
andand executive
executivemanagement
management mustmust
be be
attuned
attuned
to their
to their
issues”.
issues”.
A managing
A managing director
director
in one
in one
of the
of the
leading
leading
US US
investment
investment
banks
banks
saidsaid
he washe wasconcerned
concernedabout
about
“the“the
lossloss
of good
of good
people”.
people”.

ButBut
not not
everyone
everyone sawsawriskrisk
management
management as aasblack
a black
spot.spot.
A managing
A managing director
director
at aat a
large
large
Swiss
Swiss
bankbanksaidsaid
there
there
hadhad
beenbeen
“clear
“clear
enhancements
enhancements following
following
the the
crisis”
crisis”
andand
the the
riskrisk
manager
manager of aoflarge
a large
Greek
Greek
bankbank
saidsaid
thatthat
the the
work work
banks
banks
hadhad
donedone
on risk
on risk
management
management willwill
“improve
“improvethe the
efficiency
efficiency
of financial
of financialinstitutions
institutions
andandreduce
reduce
systemic
systemic
risksrisks
the the
coming
coming
years”.
years”.

9.9.
Credit
Credit
spreads
spreads
(3)(3)
Spreads
Spreads may
may
bebe TheThe
sudden
sudden
widening
wideningof credit
of credit
spreads
spreads
in mid-2007
in mid-2007 waswas
oneoneof the
of the
triggers
triggers
of the
of the
crisis,
crisis,
propelling
propelling
thisthis
riskrisk
highhigh
up the
up the
list.list.
Concerns
Concernson this
on this
frontfront
are are
nownow easing
easing
as as
tightening
tightening markets
markets
re-price
re-price
credit
credit
riskrisk
to more
to morerelaxed
relaxed
levels,
levels,
andand
spreads
spreads
beginbegin
to narrow.
to narrow.
TheThe
‘too
‘too
fast’
fast’ focus
focus
of concern
of concern
has has
shifted
shifted
to whether
to whetherthe the
newnew
spreads
spreads
accurately
accurately
reflect
reflect
the the
levellevel
of risk
of risk
in the
in the
system,
system,
or whether
or whethertheirtheir
seeming
seemingreturn
return
to normality
to normality is but
is but
another
another
symptom
symptom of unfounded
of unfounded optimism
optimismin the
in the
financial
financial
sector.
sector.

ManyManyrespondents
respondentsnoted
noted
an improvement
an improvement in the
in the
credit
credit
default
default
swaps
swaps
market
market
wherewhere
different
different
types
types
of credit
of credit
riskrisk
are are
priced.
priced.
OneOne
of them
of them
saidsaid
thatthat
“a major
“a major
re-evaluation
re-evaluation
of credit
of credit
risksrisks
has has
nownowbeenbeen
factored
factored
in”.in”.
ButButgenerally
generallythe the
responses
responsescontained
contained
a a
notenote
of caution.
of caution.
A European
A European regulator
regulator
saidsaid
thatthat
“a reversal
“a reversalof the
of the
credit
credit
spreads
spreads
decrease
decrease
we weare are
currently
currently
witnessing”
witnessing”waswas
a “likely
a “likely
market
market
risk”.
risk”.
A German
A German bankbank
adviser
adviser
thought
thought
thatthat
“spreads
“spreads
are are
tightening
tightening
veryvery
fast,fast,
andandmaymaystart,
start,
onceonce
again,
again,
not not
to reflect
to reflect
the the
correct
correct
balance
balance
between
between
riskrisk
andandreward”.
reward”.

10.
10.Equities
Equities(7)(7)
Equities
Equities
havehave
slipped
slipped
down down
the the
riskrisk
scale,
scale,
possibly
possibly
because
because
theythey
havehave
come come
backback
so so
strongly
strongly
since
since
the the
last last
Banana
Banana
Skins
Skins
survey
survey
whenwhen
theythey
hadhad
crashed.
crashed.
ButButthe the
recovery
recovery
is fuelling
is fuelling
a fresh
a fresh
set set
of concerns
of concerns
around
around
the the
sustainability
sustainability
of the
of the
rally,
rally,
andand
whatwhat
would
would
happen
happen
if there
if there
waswas
another
another
crash.
crash.

ManyManyrespondents
respondents commented
commented on on
the the
irrationality
irrationality
of markets.
of markets.
“If “If
onlyonly
someone
someone
could
could
explain
explain
whywhy equities
equities
are are
behaving
behaving
as they
as they
are”are”
moaned
moaned
a UK
a UK
consultant.
consultant.
TheThe
headhead
of group
of group
riskrisk
at aatUK
a UK
financial
financial
group
group
saidsaid
thatthat
“equity
“equity
markets
markets
could
could
havehave
run run
too too
far ahead
far ahead
if there
if there
are are
negative
negative
earnings
earnings
surprises”.
surprises”.

TheTheconsequences
consequences of another
of another crash
crash
would
would
be be
severe
severe
for for
the the
“real“real
economy”,
economy”,
probably
probably
plunging
plunging
it back
it back
intointo
recession
recession
andand
landing
landing
the the
banksbanks
withwith
further
further
heavyheavy
losses,
losses,
andand
dashing
dashingtheirtheir
recapitalisation
recapitalisation
plans.
plans.
OneOnerespondent
respondent
pointed
pointed
out out
thatthat
equities
equities
werewere
important
important not not
justjust
as aassource
a source
of earnings
of earningsandand
capital
capital
“but“but
as aas a
bellwether
bellwether
of confidence”
of confidence” in ain
crisis
a crisis
thatthat
waswas
essentially
essentially
about
about
confidence.
confidence.

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11.
11.Currencies
Currencies(13)
(13)
TheThecurrency
currency
markets
marketsare are
expected
expected
to remain
to remain
volatile
volatile
overover
the the
recovery
recoveryperiod
period
because
because
of the
of the
sharp
sharp
riserise
in government
in government
borrowing
borrowing
andand
the the
possibility
possibility
of big
of big
interest
interest
raterate
movements
movementsin the
in the
nextnext
yearyear
or two.
or two.
OneOnerespondent
respondent
said:said:
“The“The
market
market
is very
is very
Focus
Focus onon
thethe volatile
volatile
andand
subject
subject
to shifts
to shifts
in reaction
in reaction
to statements
to statements
by senior
by senior
financial
financial
officials”.
officials”.
volatile
volatile
TheThe
focus
focus
is particularly
is particularly
on the
on the
US US
withwith
its trillion
its trillion
dollar
dollar
debts,
debts,
but but
alsoalso
on other
on other
USUS
dollar
dollar vulnerable
vulnerable
countries
countries
suchsuch
the the
UKUK as well
as well
as the
as the
Baltic
Baltic
states
states
whose
whose
currencies
currencies
are are
pegged
pegged
to the
to the
euro,
euro,
but but
couldcould
snap,
snap,
plunging
plunging
the the
region
region
intointo
economic
economic
chaos.
chaos.

Question
Question
marksmarks
alsoalso
hanghang
overover
the the
US US dollar
dollar
in the
in the
longer
longer
termterm
withwith
mounting
mounting
speculation
speculationthatthat
it could
it couldbe be
toppled
toppled fromfrom
its its
reserve
reserve currency
currencythrone.
throne.
ManyMany
respondents
respondents
focused
focused
on the
on the
possibility
possibility
thatthat
sentiment
sentiment
mightmight
finally
finally
crack,
crack,
leading
leading
to to
the the
dollar’s
dollar’s
collapse
collapse
andanda major
a major
shiftshift
in the
in the
world’s
world’s
reserves.
reserves.A bank
A bank
supervisor
supervisor
sawsaw“possible
“possible
market
market
upheaval
upheaval
as the
as the
dollar
dollar
becomes
becomes lessless
important
important
as aasreserve
a reserve
currency”.
currency”.
China,
China,
withwith
its massive
its massive
holdings
holdings
of dollars,
of dollars,
is seen
is seen
as playing
as playinga central
a central
rolerole
in any
in any
scenario
scenario
thatthat
develops.
develops.

ButBut
a number
a number
of respondents
of respondents
werewere
more
more
sanguine
sanguine
about
about
currency
currency
risk.risk.
“I think
“I think
we we
havehave
learned
learned
to live
to live
withwith
currency
currency
movements”
movements”
saidsaid
oneone
banker.
banker.
Another
Anotherdescribed
described
the the
collapse
collapse
of the
of the
dollar
dollar
as “a
as low
“a low
probability
probability
highhigh
impact
impact
event”.
event”.A third
A third
saidsaid
“sensible
“sensible
hedging
hedging
helps”.
helps”.

12.
12.Corporate
Corporategovernance
governance(16)
(16)
ThisThis
Banana
BananaSkinSkin
shows
shows
a strong
a strong
riserise
since
since
the the
last last
survey,
survey,
reflecting
reflecting
mounting
mounting
concern
concern
about
about
the the
quality
quality
of governance
of governance within
within
banks.
banks.
No No
surprise,
surprise,
perhaps,
perhaps,
thatthat
non-bankers
non-bankers
andand
regulators
regulators
sawsaw
it asitaasgreater
a greater
riskrisk
thanthan
bankers.
bankers.
It was
It was
alsoalso
seenseen
to to
be more
be more
of an
ofissue
an issue
in America
in America
thanthan
in Europe
in Europe
or the
or the
AsiaAsia
Pacific
Pacific
region.
region.

TheThe
perceived
perceived
failings
failings
of corporate
of corporate
governance
governance
are are
many.
many.
HereHere
is aisselection
a selection
of of
quotes:
quotes:

There
There
is “ais lack
“a lack
of realism
of realism
in recognising
in recognising
thatthat
the the
causes
causes
of problems
of problems
lie within
lie within
organisations
organisations
(as (as
opposed
opposed
to pointing
to pointing
at external
at external
factors)”.
factors)”.
– –
Scepticism
Scepticism about
about Managing
Managing director,
director,
US US
bank.
bank.
thethe
prospects
prospects TheTheriskrisk
lies lies
in “the
in “the
failure
failure
of chief
of chief
executives
executives
to serve
to serve
the the
interests
interests
of of
forfor
better
better theirtheir
depositors
depositorsandand
customers
customers
rather
rather
thanthan
theirtheir
ownown(in particular)
(in particular)
andand
governance
governance theirtheir
shareholders'
shareholders'short
short
termterm
interests”. – London
interests”. – Londontrusttrust
company.
company.

There
There
is concern
is concernabout
about
“the“the
static
static
andandself-preserving
self-preserving
‘buddy
‘buddy
networks’
networks’
in high
in high
management
managementthatthat
willwill
perpetuate
perpetuate
incompetence,
incompetence,
hidehide
deficiencies,
deficiencies,
andand
leave
leave
urgent
urgent
issue”. – Bank
issue”. – Bank
director,
director,
Luxembourg.
Luxembourg.

“Boards
“Boards
are are
stillstill
underpopulated
underpopulated
withwith
serious
serious
experts,
experts,
andand
thusthus
too too
subservient
subservient
to management.” – Economist,
to management.” – Economist,
NewNew
York.
York.

WillWill
things
things
get get
better?
better?
TheTheresponses
responsesherehere
werewere
notable
notable
for for
theirtheir
scepticism,
scepticism,
eveneven
theirtheir
cynicism
cynicism
about
about
the the
corporate
corporate
governance
governancedebate.
debate.
Doubts
Doubtsthatthat
muchmuch
would
would
change
changecentred
centred
on banks’
on banks’
seeming
seeming
reluctance
reluctance
or inability
or inability
to pick
to pick
up the
up the
lessons
lessons
fromfrom
the the
crisis.
crisis.
A senior
A senior
Swiss
Swiss
banker
banker
said:said:
“Firms’
“Firms’
governance
governance
mechanisms
mechanisms andand
cultures
cultures

20 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

need to fully embed the lessons from the past 18 months. Many will struggle to do
this”.

Another concern was the lack of high calibre non-executive directors. Dennis Cox of
bank consultancy and training firm Risk Reward, said that “the expectations of
management and especially non-executive management is a major concern, and we
doubt whether there is the talent required to meet these revised obligations”.
Another respondent put it more bluntly: “Reforms will happen – but who in their
right mind would want to be a bank NED?”

But many respondents also felt that the corporate governance debate was on the
wrong track. The risk was that more regulation would weaken the sense of
responsibility of bank managements and directors, and that the answer lay in
“removing the interference of governments and politics in management”.

Trust
The damage done by the crisis to confidence in banks could be a major source of
risk, and banks will have to work hard to repair it. This was a recurring theme in the
responses to this survey.

A fund manager said that “the fall in confidence by the public, investors and
governments has damaged credibility in the sustainability of the system.
Redressing this will take years, limiting the ability of a number of banks to regain
capital strength and develop.”

Adrian Lloyd, enforcement and regulatory affairs director at the UK’s Banking Code
Standards Board, said that “confidence in banks in Europe and the USA remains
fragile at best. Informed depositors are willing to leave savings in banks and
mutuals only where they are secured by government-backed deposit protection
schemes or by government guarantees, whether explicit or implicit ('too big to
fail').”

Several respondents raised the possibility of more bank failures, particularly where
governments can no longer afford to bail them out. A UK respondent asked: “If
there is another significant bank that fails during this recovery process, what would
the public and government reaction be? Has all the stress testing dealt with this
issue?”

Mistrust is not just about the soundness of banks but about the quality of their
accounts. Many respondents felt that “accounting fudges” were being used to
conceal the worst of bank exposures, and that sophisticated trading techniques
were being deployed to move risk out of sight. A US banker feared that “financial-
economic pressures may lead to 'creative' accounting practices becoming more
widespread”.

13. Commodities (12)


Concern about the risks in commodity markets has changed little during the course
of the crisis. They are still seen as volatile and unpredictable, with oil and gold
heading the list, and China’s voracious appetite and US energy profligacy the
causes. Concern about this risk was strongest in the Asia Pacific region (No. 6).

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 21


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Respondents
Respondents
mademade
the the
point
point
thatthat
commodity
commodityvolatility
volatility
should
should
not not
posepose
a major
a major
riskrisk
to banks
to banks
because
because
these
these
markets
markets
are are
wellwell
understood,
understood,andand
there
there
are are
plenty
plenty
of ways
of ways
banks
banks
can can
protect
protect
themselves
themselvesagainst
against
them.
them.

In some
In somewaysways
the the
greater
greater
risksrisks
lie in
liethe
in the
political
political
consequences:
consequences: whatwhat
willwill
unstable
unstable
oil do
oil to
dothe
to the
Middle
Middle
EastEast
andand
Russia,
Russia,
howhow
willwill
China
China
reactreact
if it ifcannot
it cannot
gaingain
access
access
to to
the the
resources
resources
it needs?
it needs?

“Still
“Still
volatile
volatile
– and
– and
stillstill
proneprone
to over-reaction”,
to over-reaction”,
saidsaid
oneone
respondent.
respondent.

14.
14.Interest
Interest
rates
rates
(9)(9)
Concern
Concernabout
about
interest
interest
ratesrates
has has
eased eased
– at– least
at least
for for
the the
timetime
being.
being.
TheThe
medium
medium
termterm
outlook
outlook
(up (up
to atoyear?)
a year?)
is for
is for
lowlowandand
relatively
relatively
stable
stable
interest
interest
rates.
rates.
TheThe
fun fun
comes
comes
later,
later,
when when
central
central
banksbanks
havehaveto extricate
to extricate
themselves
themselvesfromfrom
the the
markets
markets
andand
governments
governmentsbeginbegin
to address
to address
theirtheir
mounting
mounting
debts.
debts.
At that
At that
point,
point,
inflation
inflation
maymay
alsoalso
A surge
A surge in in
interest
interest begin
begin
to rear
to rear
its ugly
its ugly
head,head,
andanda rise
a rise
in rates
in rates
lookslooks
inevitable.
inevitable.

rates
rates
is is
inevitable,
inevitable, ButBut
while
while
the the
raterate
outlook
outlook
is alarming,
is alarming,
it isitalso
is also
to some
to some
extent
extent
predictable.
predictable.
OneOne
but
but
also
also respondent
respondent
asked:
asked:
“What
“What
happens
happenswhenwhen
the the
'punch
'punch
bowl'
bowl'
is removed.
is removed.
WillWill
we have
we have
a a
series
series
of rate
of rate
risesrises
similar
similar
to 1994?”
to 1994?”
predictable
predictable
TheThe
impact
impact
could
could
be severe.
be severe.
Michael
Michael
Taylor,
Taylor,
adviser
adviser
to the
to the
Central
Central
Bank
Bank
of Bahrain,
of Bahrain,
warned
warned
thatthat
changes
changes
in interest
in interest
ratesrates
would
would
hit asset
hit asset
values
values
andand
bondbond
prices.
prices.
“So“So
far far
the the
extraordinary
extraordinary measures
measures havehaveworked
worked
in the
in the
sense
sense
thatthat
theythey
havehave
averted
averted
something
something far far
worse,
worse, but but
havehavewe we
thereby
thereby
already
already
laidlaid
the the
foundations
foundations
for for
the the
nextnext
crisis?”
crisis?”
The Thecaution
caution factor
factor
The The
biggest
biggest
problem
problem
nownow
is the
is the
Rising
Risingratesrates
wouldwouldput put
a strain
a strainon on combination
combination
of the
of following
the following
factors
factors
borrowers
borrowersandand produce
producea surge
a surge in bad distracting
in bad distracting
management
management fromfrom
doingdoing
theirtheir
debts.
debts.
A shift
A shiftin the
in the
yieldyield
curve
curve could job: job:
could government
governmentregulation
regulation
in the
in widest
the widest
alsoalsocause
cause problems.
problems. JohnJohn Grout, sense;
Grout, sense;
fearfear
of repeating
of repeating
the the
mistakes
mistakes
of of
the past;
the past;
uncertainty
uncertaintyaboutabout
the ability
the ability
of of
policy
policy
andand technical
technicaldirector
director
at the
at the counterparties
counterparties
to stay
to stay
solvent;
solvent;
Association
Association of ofCorporate
Corporate Treasurers,
Treasurers, uncertainty
uncertainty
aboutabout
central
central
bankbank
policy;
policy;
saidsaid
thatthat
“big“bigmovements
movements up must
up mustbe be impact
impact
of central
of central
bankbank
policies
policies
on the
on the
expected
expectedat some
at some point.
point.
TheThebiggest
biggest future
future
value
value
of currencies,
of currencies,
andandon the
on re-
the re-
riskrisk
for for
banksbanksis ais flattening
a flatteningof the
of the emergence
emergenceof inflation;
of inflation;
uncertainty
uncertainty
yield
yield
curve”.
curve”. aboutabout
the the
inevitability
inevitability
of the
of latter
the latter
andand
the timing
the timing
thereof.
thereof.
Meanwhile,
Meanwhile,lowlowinterest
interest
ratesrates
can can
bringbring
All these
All these
leadlead
to excessive
to excessive
caution,
caution,
problems
problemsof oftheirtheirown. own.Some Some inhibiting
inhibiting
the extending
the extendingof credit
of credit
to the
to the
respondents
respondentssawsawthem them
providing
providinga spur
a spur productive
productive
sector,
sector,
andand
correspondingly
correspondingly
to greater
to greater
risk-taking
risk-takingto earn
to earnprofits.
profits. the the
increasing
increasing
risk risk
of mispricing
of mispricing
of asset
of asset
Consultant
Consultant
PaulPaul
Hattori
Hattori
saidsaid
thatthat
“long“long values.
values.
termterm
interest
interest
ratesrates
at low
at lowlevels
levels
willwill
onlyonly
encourage
encourage investors
investorsto doto domore more City City
chairman
chairman
stupid
stupid
things
things
in search
in searchof yield
of yield
as they
as they
comecome
to believe
to believe
the the
worstworst
is over”.
is over”.
TheyThey
alsoalso
squeeze
squeeze
profitability.
profitability.
A Luxembourg
A Luxembourg
banker
banker
feared
feared
thatthat
“the“the
negative
negative
impact
impact
to the
to the
P&LP&L of the
of the
banksbanks
maymayoccur
occur
before
before
balance
balance
sheets
sheets
are are
restored
restored
fromfromthe the
impact
impact of the
of the
current
current
crisis”.
crisis”.
A divisional
A divisional
director
director
of one
of oneof the
of the
large
large
UKUK building
building
societies
societies
waswas concerned
concernedaboutabout
“ongoing
“ongoing
super
super
lowlow
interest
interest
ratesrates
whichwhich
suppress
suppress
margins”.
margins”.

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15.
15.Fraud
Fraud
(11)
(11)
OneOne reason
reason
whywhyfraud
fraud
has has
slipped
slipped
down down
the the
ranking
ranking
is that
is that
there
there
havehave
beenbeen
fewfew
recent
recent
headline-grabbing
headline-grabbing cases.
cases.
In fact,
In fact,manymanyrespondents
respondentscommented
commented on onthe the
surprising
surprising
scarcity
scarcity
of frauds
of frauds
during
during
a time
a time
of recession,
of recession,
which
which
is usually
is usually
whenwhen
theythey
come come
to light,
to light,
Madoff
Madoffbeing
being
a case
a case
in point,
in point,
though
though
thatthat
waswas
not not
exactly
exactly
bankbank
fraud.
fraud.
TheTheincidence
incidence
of fraud
of fraud
“has“has
not not
yet yet
risenrisen
by asbymuch
as muchas one
as one
wouldwould
expect
expect
given
given
the the
statestate
of the
of the
tide,”
tide,”
saidsaid
oneone
respondent.
respondent.
“I am“I am
convinced
convincedmoremore
serious
serious
frauds
frauds
willwill
be be
exposed
exposedbefore
before
economic
economicrecovery
recovery
arrives,”
arrives,”
saidsaid
another.
another.

TheThe
mainmain
variation
variation
in this
in this
riskrisk
waswas
geographical:
geographical:
it scored
it scored
higher
higher
in the
in the
AsiaAsia
Pacific
Pacific
region
region
(No.(No.
10) 10)
andand
among
among
emerging
emerging
economies
economies
(No.(No.
6). 6).

TheTheconcern
concern
is both
is both
about
about
internal
internal
andand
external
external
fraud
fraud
as systems
as systems
become
becomemore more
complex
complexandand
vulnerable.
vulnerable.
Advances
Advancesin electronic
in electronic
technology
technology
are are
always
always
widening
widening
the the
scope
scope
for for
intrusion
intrusion
andand
datadata
manipulation,
manipulation,according
according
to Topi
to Topi
Manner,
Manner,
executive
executive
vice-president
vice-president at Nordea
at NordeaBankBankin in
Finland.
Finland.
A Russian
A Russianrespondent
respondent
saidsaid
thatthat
information
information
security
security
waswas
probably
probably
the the
greatest
greatest
riskrisk
thatthat
Russian
Russian
banks
banks
faced
faced
overover
the the
nextnext
2-3 2-3
years.
years.

A concern
A concern
among
amongbanking
banking
respondents
respondentswaswas
the the
effect
effect
thatthat
a biga big
bankbank
fraud
fraud
might
might
havehave
on banking
on bankingconfidence
confidenceat aattime
a time
whenwhen
the the
system
system
is sois fragile.
so fragile.
TheThe
headhead
of of
regulatory
regulatory
strategy
strategy
at aatlarge
a large
US US bankbank
saidsaid
thatthat
“fraud
“fraud
maymay undermine
undermine
investor
investor
confidence
confidence
resulting
resulting
in excessive
in excessive
caution”.
caution”.

16.
16.Management
Managementincentives
incentives
(17)
(17)
TheThe
rowrow
overover
bonuses
bonuses andandincentives
incentives
has has
pushed
pushed
thisthis
Banana
Banana
SkinSkin
up aupplace.
a place.
ButBut
whatwhat
is the
is the
risk:risk:
thatthatperverse
perverse
incentives
incentives
willwill
destroy
destroy
banks,
banks,
or or
thatthat
newnew
regulation/tax
regulation/tax
willwill
kill kill
the the
golden
golden
goose?
goose?
Respondents
Respondents
werewere
sharply
sharply
divided
divided
on this
on this
What
What
is is
worse:
worse: question.
question.
paying
paying
bonuses
bonuses
or or
Non-bankers
Non-bankers tended
tended
towards
towardsthe the
firstfirst
of these
of these
views.
views.
TheThebonusbonus
culture
culture
waswasnot not
onlyonly
banning
banningthem?
them? out out
of control
of controlbut butdangerous:
dangerous: it was
it was
creating
creatingthe the
wrong
wrongincentives,
incentives,andanddulling
dulling
bankers’
bankers’
sense
sense
of risk.
of risk.
Moreover,
Moreover, banksbanks
werewere
failing
failing
to take
to take
on board
on board
thatthat
something
something
needed
needed
to be
to done
be done aboutabout
it. Martin
it. MartinHall,Hall,
a non-executive
a non-executive director
director
of Broadcastle
of Broadcastle
Bank,
Bank,
saidsaid
thatthat
“banks“banksdo not
do not appear
appear
to have
to havegot got
the the
message
messageandandare are
likely
likely
to to
remain
remain
in the
in the
political
political
doghouse”.
doghouse”. A London
A London consultant
consultant
saidsaid
thatthat
the the
situation
situation
waswas
“gradually
“gradually
improving
improving – but– butthe the
needneedfor for
reform
reform
is not
is not
yet yet
fullyfully
‘owned’
‘owned’ by the
by the
firms”.
firms”.
A banker
A banker addedaddedthatthat
“perverse
“perverseincentives
incentives(not(not
necessarily
necessarilythe the
levellevel
of of
incentives)
incentives)
are are
the thecorecore
of ourof ourindustry's
industry's
problems,
problems, at all
at all
levels
levels
of significant
of significant
management
management andandriskrisk
taking.
taking.
These These
havehave
not not
beenbeen
solved”.
solved”.

TheThe
opposing
opposingviewview
holds holds
thatthat
remuneration
remuneration should
should
not not
be abepolitical
a political
issue,
issue,andand
thatthat
attempts
attempts
to regulate
to regulate
it could
it could
endendup damaging
up damaging the the
business,
business,
specially
specially
if itifisitdone
is done
on on
a country-by-country
a country-by-country basis basis
rather
rather
thanthan
through
through
international
international
agreement.
agreement. A London
A London
investment
investmentbanker
banker
asked:asked:
“Will
“Will
remuneration
remuneration be sorted
be sorted
out out
on aonlevel
a level
playing
playing
fieldfield
basis
basis
so that
so that
therethere
is notis not
a run
a run
on talent
on talent
to other
to other
markets,
markets,
leaving
leaving
some some markets
markets
vulnerable
vulnerable
to atoshortage
a shortage of talent,
of talent,
leading
leading
to decline
to decline
in market
in market
position?”
position?” ThisThis
waswas
not not
merely
merely
an Anglo-Saxon
an Anglo-Saxon preoccupation.
preoccupation. A German
A German bankbank
respondent
respondentwarnedwarnedthatthat
tax tax
andand
regulatory
regulatory
interference
interferencein bonuses
in bonuses“could
“could
leadlead
to ato
deterioration
a deterioration
in morale”.
in morale”.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 23


C S F I / New York CSFI

A USA USbankbank
riskrisk
manager
manager
evenevenargued
argued
that,that,
withwith
banksbanks
nownow holding
holding
billions
billions
of of
dollars
dollars
of taxpayers’
of taxpayers’money,
money,it was
it was
in the
in the
public
public
interest
interest
to have
to have
compensation
compensation
schemes
schemes
thatthat
attracted
attracted
the the
bestbest
talent
talent
to manage
to manage it. “If
it. these
“If these
firmsfirms
are are
not not
permitted
permitted
to pay
to pay
competitively,
competitively,
we wewillwill
findfind
thatthat
those
those
whowho remain
remain
in employment
in employment therethere
willwill
not not
be the
be the
brightest
brightest
andand
best,best,
andand hence
hence
not not
the the
bestbest
stewards
stewardsto turn
to turn
thesethese
firms
firms
around
around
andand
return
return
the the
government/taxpayers
government/taxpayers funds.”
funds.”

ButBut
others
others
felt felt
the the
steam
steam
waswas
going
going
out out
of the
of the
issue.
issue.
A regulator
A regulator
saidsaid
thatthat
there
there
waswas
“more
“more
awareness
awareness andand
concern
concern
about
about
perverse
perverse
incentives,
incentives,
hence
hence
a lowering
a lowering
of the
of the
riskrisk
level”.
level”.
A Swiss
A Swissbanker
banker
sawsaw
thisthis
riskrisk
“falling
“falling
duedue
to compensation
to compensation
rules”.
rules”.

17.
17.Emerging
Emergingmarkets
markets(18)
(18)
AreAre
emerging
emerging
markets
markets
a risky
a risky
bet bet
or, in
or,today’s
in today’s
environment,
environment,
a better
a better
prospect
prospect
thanthan
the the
developed
developed
world?
world?

Clearly,
Clearly,
it isit hard
is hard
to generalise,
to generalise,
but but
the the
tonetoneof many
of many responses
responseswaswas
cautious.
cautious.
Concern
Concernabout
about
the the
macro-economic
macro-economic outlook
outlook
waswas stronger
stronger
among
amongrespondents
respondents
fromfrom
emerging
emergingcountries
countries
(No.(No.
3) than
3) than
industrial
industrial
countries
countries(No.(No.
5), mainly
5), mainly
because
because
of the
of the
dangers
dangers
over-hasty
over-hasty
recovery
recovery
producing
producing
assetasset
bubbles..
bubbles..There
There
waswas
“overconfidence
“overconfidencein in
the the
safety
safety
of emerging
of emergingmarkets”,
markets”,
according
accordingto Sheila
to Sheila
Page,Page,
senior
senior
research
research
associate
associate
at the
at the
UK’s UK’s
Overseas
Overseas
Development
Development Institute.
Institute.
“Vulnerabilities
“Vulnerabilities
remain”,
remain”,
according
according
to to
the the
director
director
of risk
of risk
management
management at one
at one
of the
of the
largelarge
regional
regional
development
development banks.
banks.

SomeSome
of the
of the
caution
cautionhas has
to do
to with
do withuncertainty
uncertainty
overover
China’s
China’s
prospects,
prospects,
the the
opaque
opaque
A better
A better
prospect,
prospect, political
political
situation
situationin Russia,
in Russia,andandthe the
growing
growingassertiveness
assertivenessof leaders
of leaders
in Latin
in Latin
or or
a risky
a risky
bet?
bet? America.
America.Ioannis
IoannisGousios,
Gousios, director
director
of banking
of banking
supervision
supervision
at the
at the
Bank Bank
of Greece,
of Greece,
waswasparticularly
particularly
concerned
concerned about
about
emerging
emerging
European
Europeaneconomies
economies where,
where,
he said,
he said,
there
there
waswasa risk
a risk
thatthat
“loans“loans
thatthat
werewere
restructured
restructured
to avoid
to avoiddefault
default
become
becomenon-non-
performing
performinganyway,
anyway, thatthat
collateral
collateral
pledged
pledged
proves
proves
to be
to worth
be worthlessless
thanthan
initially
initially
thought
thought
andandthatthat
rising
rising
unemployment
unemployment andandcorporate
corporate
insolvencies
insolvenciesin the
in the
region
region
create
create
moremore
badbaddebts”.
debts”.
TheThechief
chief
riskrisk
officer
officer
at aatbank
a bank
in India
in India
saidsaid
there
there
waswas “a “a
general
general
perception
perception thatthat
the the
country
countryis either
is either
fairly
fairly
immune
immune to economic
to economic activity
activity
elsewhere,
elsewhere,
or isoralready
is alreadybenefiting
benefiting
fromfrom
an economic
an economic recovery,
recovery,
bothboth
of which
of which
points
points
of view
of view
might
might
be over-optimistic”.
be over-optimistic”.

ButButother
other
respondents
respondentswerewere
moremore
upbeat.
upbeat.
James
James
Prichard,
Prichard,
an emerging
an emergingmarkets
markets
trader
trader
at WestLB
at WestLB in London,
in London,saidsaid
thatthat
worries
worries
about
about
emerging
emergingmarket
market
exposure
exposure
meant
meant
thatthat
“many
“many
banks
banks
are are
pulling
pulling
back,
back,
leaving
leaving
justjust
a few
a few
players
players
to benefit”.
to benefit”.

18.
18.High
Highdependence
dependenceonon
technology
technology
(15)
(15)
TheThe
highhigh
dependence
dependence on technology
on technology thatthat
banks
banks
havehave
builtbuilt
up over
up over
the the
years
years
is nois no
longer
longer
the the
critical
critical
issueissue
thatthat
it once
it once
waswas
(this(this
Banana
Banana
SkinSkin
waswasconsistently
consistently
in the
in the
TopTop
TenTen
in earlier
in earlier
timestimes
– see– psee
??).
page The10).
problems
The problems
are betterareunderstood,
better understood,
the pace the
of change
pace ofhas
change
slowed, has and
slowed,
in some
and areas
in some such
areas
as the
suchcustomer
as the customer
interface interface
it has evenit has
beeneven
pushed
beenback
pushed
a bitback
withathe
bit drive
with the
to deliver
drive toa deliver
more personalised
a more personalised
service. service.

ButBut
issues
issues
remain.
remain.
ThisThis
waswas
ranked
ranked a Topa Top
TenTenriskrisk
in the
in the
AsiaAsia
Pacific
Pacific
region,
region,
particularly
particularly
among
amongemerging
emerging
economies.
economies. TheThechief
chief
executive
executive
of an
of Indian
an Indian
bankbank
saidsaid
thatthat
“operational
“operational
andand
reputational
reputational
risksrisks
fromfrom
increasing
increasing
dependence
dependenceon technology
on technology
andand
payment
payment
systems
systems
are are
among
among
the the
risksrisks
thatthat
banks
banks
faceface
currently.”
currently.”

24 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

Bottom
Bottom
lineline
worries
worries
Ultimately,
Ultimately,
all Banana
all Banana
Skins
Skins
are are
risksrisks
to the
to the
bottom
bottom
line.line.
HereHere
is a is
selection
a selection
comments
commentson that
on that
theme.
theme.

The The
prospects
prospects
for banking
for banking
profitability
profitability
are are
not not
great,
great,
thanks
thanks
to atoraft
a raft
of factors
of factors
including
including
general
general
economic
economic
weakness,
weakness,low low
interest
interest
rates,
rates,
political
political
pressure
pressure
on on
banks
banks
to engage
to engage
in low-profit
in low-profit
activities
activities
for the
for good
the good
of the
of the
economy,
economy,andand
tighter
tighter
regulatory
regulatory
constraints.
constraints.
Executive
Executive
director,
director,
banking
banking
trade
trade
group
group

There
There
must must
be concern
be concern
about
about
whether
whether
financial
financial
services
services
firms
firms
will be
willable
be able
to to
generate
generate
sufficient
sufficient
profit
profit
to remain
to remain
viable.
viable.
Chief
Chief
executive,
executive,
UK building
UK building
society
society

LackLack
of profitability
of profitability
is going
is going
to be toabe
drain
a drain
on the
on the
vitality
vitality
of the
of system
the system going
going
forward,
forward,
all the
all the
more more
so insoEurope
in Europe
if leverage
if leverage
is capped
is capped
withwith
relatively
relatively
littlelittle
regard
regard
for the
for the
quality
quality
of what
of what
is being
is being
leveraged.
leveraged.
Credit
Credit
strategist,
strategist,
multinational
multinationaldevelopment
developmentbankbank

HighHigh
capital
capital
requirements
requirements
will reduce
will reduce
return
return
on equity,
on equity,
which
which
will lead
will lead
to lower
to lower
equity
equity
prices
prices
andand
more
more
problems
problemsraising
raising
newnew
capital.
capital.
Board
Board
member,
member,
German
German
bankbank

TheThe
management
management of online
of online
systems
systems
is aisbig
a big
problem,
problem,as isasdata
is data
security.
security.
A Russian
A Russian
respondent
respondent
saidsaid
thatthat
“as “as
internet
internet
banking
bankingdevelops,
develops, attacks
attacks
on client
on client
bankbank
accounts
accounts
willwill
increase”.
increase”.
TheThe upcoming
upcoming migration
migrationof Over-the-Counter
of Over-the-Counter derivatives
derivatives
to public
to public
exchanges
exchanges
willwill
increase
increase
technology
technologyrisk,risk,
according
according to one
to one
respondent.
respondent.
NewNewYork
York
economist
economist
Roger
RogerKubarych
Kubarychsaidsaid
thatthat
firms firms
andand regulators
regulators
taketake
for for
granted
granted
thatthat
information
information
technology
technologyis well
is well
run.run.
“What“Whatif itifisn't?
it isn't?
It has
It has
beenbeen
starved
starved
of resources
of resources
in many
in many
financial
financial
institutions
institutions
for short-sighted,
for short-sighted, near-term
near-term budgetary
budgetaryconcerns.”
concerns.”

Consultant
Consultant
Steve
Steve
Dyson
Dyson
saidsaid
thatthat
“the“the
sector
sector
needsneeds
to invest
to invest
a huge
a huge
amount
amount
in new
in new
technology
technology
to keep
to keep
pacepace
withwith
the the
monitoring
monitoring
andand
management
management of risk.
of risk.
This,
This,
allied
allied
withwith
the the
needneed
to invest
to invest
in upgrading/replacing
in upgrading/replacing legacy
legacy
systems,
systems,
willwill
place
place
a huge
a huge
burden
burden
on budgets
on budgets
overover
the the
nextnext
2-3 2-3
years”.
years”.

SomeSome
respondents
respondents
mademade
the the
point
point
thatthat
riskrisk
not not
onlyonly
lies lies
withwith
the the
systems
systems
but but
in in
managing
managing
– and
– and
retaining
retaining
– the
– the
people
people
whowhorun run
themthem
andand
understand
understand
them.
them.
A banker
A banker
in Luxembourg
in Luxembourgsaidsaid
banks
banks
depended
depended
“on“on
particular
particular
individuals
individuals
withwith
a monopoly”.
a monopoly”.

19.
19.Hedge
Hedgefunds
funds
(10)
(10)
A dramatic
A dramatic
dropdrop
in concern
in concern
here,
here,
in line
in line
withwith
the the
generally
generally
lower
lower
profile
profile
taken
taken
by by
hedge
hedge
funds
funds
during
during
the the
crisis.
crisis.

A sharp
A sharp
drop
drop
in in TheThefunds
funds
are are
not not
attracting
attracting
the the
levellevel
of attention
of attention
theythey
did did
earlier
earlier
through
throughtheirtheir
concern
concern
about
about aggressive
aggressive
position
position
taking,
taking,
short
short
selling
selling
andand
shareholder
shareholder
activism.
activism.
Some Some
respondents
respondents
pointed
pointed
out out
thatthat
theythey
werewereactually
actually
better
better
managed
managed
thanthan
banks.
banks.
Regulatory
Regulatory moves
moves
hedge
hedge
funds
funds are are
alsoalso
afoot
afoot
to put
to put
them them
on aonshorter
a shorter
leash.
leash.
“The “The
onceonce
dominant
dominant
sector
sector
is nois longer
no longer
in charge.
in charge.
RealReal
money
moneyinvestors
investors
makemake
longer
longer
termterm
decisions
decisions
withwith
theirtheir
ownown money”,
money”,
saidsaid
oneone
respondent.
respondent.

ButBut
the the
funds
funds
are are
stillstill
making
making
theirtheir
presence
presence
felt.felt.
An Aninvestment
investment
banker
banker
saidsaid
thatthat
while
while
hedgehedge
funds
funds
“are“are
not not
nownowa concern
a concern
withwith
respect
respect
to driving
to driving
up leverage
up leverage
in in

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 25


C S F I / New York CSFI

buy-outs etc., they are making work-outs more volatile/uncertain as they are
purchasing distressed debt at significant discounts and acting with a very different
agenda to banks within work-outs”. Many respondents said that banks’ exposure to
hedge funds needed to be “well-managed”.

Referring to regulatory initiatives in this area, one respondent said that “at present
there is more risk to the funds than from them”. However some respondents feared
that tougher controls would merely drive the sector to less well regulated centres.
“Many hedge funds will relocate outside the EU”, said one. In Hong Kong, Paul
Lejot of the Asian Institute of International Financial Law said that “a loss of
business is likely from the regulated sector”.

20. Rogue trader (14)


This Banana Skin goes up and down in line with recent history. The last survey (in
2008) followed the discovery of Jérôme Kerviel’s massive fraud at Société
Générale. Since then, there have been no major incidents, and so the risk of rogue
trading is seen to have eased.

The question is whether the pressures of recession make a rogue trader more likely.
The answer seems to be yes. A regulator said: “The risk is always there. They tend
to be discovered in falling markets.”

A consultant observed that there are “fewer traders. But those that are left may be
under more pressure to save their jobs (which is a more powerful encouragement to
fraud than getting a bonus)”. Since major incidents tend to occur every 3-4 years, the
time for another one must be approaching.

21. Business continuation (23)


Little change in the perceived risk here: the Banana Skin that shot high up the list in
the wake of 9/11 has eased off sharply.

Although terrorist attacks continue to earn mentions as potential sources of risk,


pandemics such as swine ‘flu are there too, as are crashes in the system.

However, the broader feeling is that banks have put a lot of work into this area, and
are less vulnerable, though this could also lead to complacency. “Some danger of
this falling off the radar”, said one consultant.

22. Retail sales practices (20)


The mistreatment of retail clients continues to be a source of risk to banks, even
though the worst of the mis-selling abuses may now be behind us. Some of the risk
is of a reputational kind, some financial. In the words of a Canadian banker, the risk
is “over-promising in a competitive market fuelled by bonus objectives”. New
regulation proposed through initiatives like the FSA’s Retail Distribution Review to
separate the sales and advice functions in financial products should help contain
some of this risk, though some respondents felt that mis-selling is now so deeply
ingrained in banks that they will have trouble adjusting. Regulation will be “a huge
shock” said one UK respondent.

26 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

There
There
is also
is also
the the
wider
wider
question
question
of how
of how
the the
crisis
crisis
willwill
affect
affect
banking
banking
relationships
relationships
at at
the the
retail
retail
end.end.
SomeSome
respondents
respondentsfeared
feared
thatthat
it may
it may
aggravate
aggravate
them them
by forcing
by forcing
banks
banks
to pass
to passon onthe the
costs
costs
of additional
of additionalregulation,
regulation,andandto take
to take
a tougher
a tougher
lineline
withwith
delinquent
delinquent customers.
customers.
There
There
is also
is also
the the
opposite
oppositerisk:risk:
thatthat
bankbank
customers,
customers,having
having
beenbeen
rescued
rescuedfromfrom
the the
banks’
banks’
mistakes,
mistakes,
willwill
startstart
“mistreating”
“mistreating”the the
banks.
banks.
A group
A group
strategist
strategist
at one
at one
of the
of the
largelarge
UKUK banks
banks
foresaw
foresaw“a further
“a further
erosion
erosion
of any
of any
sense
sense
of of
personal
personal
responsibility
responsibility
by consumers”.
by consumers”.

Richard
Richard
Higham
Highamof of
salessales
training
training
consultancy
consultancy Mercuri
MercuriInternational
International
saidsaid
the the
objective
objective
for for
banks
banks
should
should
be to
bemake
to make
theirtheir
salessales
andand
riskrisk
cultures
cultures
moremore
consistent.
consistent.
ThisThis
would
would
helphelp
them
them
“retain
“retain
goodgood
customers
customerswhowho feelfeel
abused
abused
by their
by their
treatment
treatment
overover
the the
pastpast
year”.
year”.

23.
23.Conflicts
Conflictsofof
interest
interest
(21)
(21)
ThisThis
is one
is one
of those
of those
Banana
Banana
Skins
Skins
(like(like
corporate
corporategovernance
governanceandand
management
management
incentives)
incentives)
on on
which
which
bankers
bankers
andand
non-bankers
non-bankerstaketake
sharply
sharply
different
different
views,
views,
for for
fairly
fairly
obvious
obvious
reasons.
reasons.
TheThe
bankers
bankers
thinkthink
theythey
understand
understandthe the
riskrisk
andand
playplay
it down,
it down,
the the
non-bankers
non-bankers
think
think
the the
bankers
bankers
are are
ignoring
ignoring
it, wilfully
it, wilfully
or otherwise.
or otherwise.
Conflicts
Conflicts
areare
becoming
becoming more
more TheThe
riskrisk
is that
is that
banksbanks
willwill
damage
damage confidence
confidence
by placing
by placing
theirtheir
ownowninterests
interests
above
above
those
those
of their
of their
clients,
clients,
a risk
a risk
thatthat
has has
growngrown
withwith
the the
emergence
emergenceof “universal
of “universal
banks”
banks”
complicated
complicated combining
combining many manydifferent
different
functions.
functions.TheThe
bankers’
bankers’
viewpoint
viewpoint
waswassummed
summed up by
up aby a
respondent
respondentfromfroma Channel
a ChannelIslands
Islands
bank:bank:
“This
“This
is always
is always
an issue,
an issue,
but but
wellwell
managed
managed
in our
in our
business”.
business”. Others
Others
saidsaid
thatthat
the the
perception
perception
of conflicts,
of conflicts,
if not
if not
the the
conflicts
conflicts
themselves,
themselves,waswas rising.
rising.

ButBut
withwith
the the
intrusion
intrusion
of state
of state
ownership
ownership
during
during
the the
crisis,
crisis,
these
these
conflicts
conflicts
havehave
alsoalso
become
becomemoremore
complex.
complex. WhoWho are are
bankers
bankers
nownowsupposed
supposed to be
to be
serving:
serving:
theirtheir
customers,
customers,
theirtheir
shareholders
shareholdersor the
or the
taxpayers?
taxpayers?
OneOne respondent
respondentsawsawthe the
riskrisk
increasing
increasing
“as “as
the the
oligopoly
oligopoly
shrinks
shrinks
andand
governments
governmentsget get
more more
entwined
entwined
withwith
the the
financial
financial
services
services
industry”.
industry”.

However
Howevera number
a numberof respondents
of respondents
felt felt
thatthat
banksbanks
andand
regulators
regulators
werewere
addressing
addressing
these
these
conflicts
conflicts
andand
reducing
reducing
the the
scale
scale
of the
of the
risk.risk.

24.
24.Back
Backoffice
office
(19)
(19)
TheTherisksrisks
in the
in the
backback
office
office
usually
usually
arisearise
because
because
of cost
of costcutting.
cutting.
ManyMany of our
of our
respondents
respondents saidsaid
thatthat
backback
office
office
budgets
budgetshadhadbeenbeen
trimmed
trimmed as part
as part
of recession-
of recession-
driven
driven
cutbacks,
cutbacks,
andandthatthat
these
these
werewere
falsefalse
savings.
savings.
EvenEven
though
though
business
business
volumes
volumes
are are
down, down,
the the
complexity
complexityof the
of the
current
current
environment
environment – plus
– plus
panics
panics
andandfailures
failures
– –
means
meansthatthat
banks
banks
needneed
to have
to have
veryvery
robust
robust
backback
offices.
offices.
It isItnot
is not
onlyonly
a matter
a matter
of of
processing
processing business,
business,
but but
documenting
documenting collateral
collateral
andand
guarantees,
guarantees, tracking
tracking
defaults
defaults
andand
ensuring
ensuring
contract
contract
enforceability.
enforceability.

“Cost
“Cost
cutting
cutting
andandconsolidation
consolidation
strains
strains
are are
impacting
impacting
the the
ability
ability
[of [of
banks]
banks]to to
strengthen
strengthen
processes
processes
andand
controls
controls
around
around
newnew
product
product
offerings
offerings
at aattime
a time
when
whentheythey
are are
already
already
struggling
struggling
to provide
to providean anadequate
adequate
service
service
for for
existing
existingclients
clients
for for
products”,
products”,
saidsaid
a London
a London
investment
investment
manager.
manager.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 27


C S F I / New York CSFI

On On
the the
other
other
hand,
hand,
muchmuch
workwork
has has
alsoalso
beenbeen
donedone
to improve
to improve thisthis
sideside
of banks’
of banks’
operations
operations
through
through
greater
greater
automation
automation
andand
the the
resolution
resolution
of specific
of specific
problems
problemslikelike
derivatives
derivatives
settlement.
settlement.
AndAnd
theythey
havehave
heldheld
up well
up well
in the
in the
crisis.
crisis.
OneOnebanker
banker
saidsaid
thatthat
thisthis
waswas“always
“always
a risk
a risk
area,area,
but but
becoming
becominglessless
so with
so with
established
established
systems
systems
andand
processes”.
processes”.

A looming
A looming issue
issue
is how
is how
backback
offices
offices
willwill
copecope
withwith
a growing
a growingregulatory
regulatory
andand
compliance
complianceworkload.
workload.
A respondent
A respondent
fromfrom
a large
a large
Swiss
Swiss
bankbank
saidsaid
thatthat
“pressures
“pressures
on on
backback
offices
offices
seemseem
to be
to be
easing,
easing,
however
however the the
spectre
spectre
of new
of newregulations
regulations
andand
accounting
accounting
standards
standards
willwill
addadd
newnewdemands”.
demands”. Looking
Looking
at the
at the
budgetary
budgetary
implications
implications
of of
thisthis
workload,
workload,another
another
Swiss
Swissbanker
banker admitted
admittedto to
a dilemma
a dilemma overover
“the“the
implementation
implementationof regulations versus
of regulations versus
costcost
control
control
pressure”.
pressure”.

25.
25.Environmental
Environmentalrisk
risk
(25)
(25)
No No
change
change
herehere
despite
despite
the the
growing
growing
pressures
pressures
of climate
of climate
change
change
andand
the the
recent
recent
prominence
prominence
of the
of the
Copenhagen
CopenhagenSummit.
Summit.

Bankers
Bankersare are
not not
known
known for giving
for giving
a high
a high
ranking
ranking
to environmental
to environmental risk.risk.
TheThe
highest
highest
position
position
thisthis
Banana
Banana
SkinSkin
has has
reached
reached
in more
in more
thanthan
15 years
15 years
of surveys
of surveysis No.
is No.
25, 25,
reflecting
reflecting
a belief
a belief
thatthat
the the
riskrisk
to profits
to profits
is political
is political
rather
rather
thanthan
financial,
financial,
andand
eveneven
where
where
it isitfinancial,
is financial,
the the
exposures
exposures
are are
not not
critical
critical
or near
or near
term.
term.

At the
At the
same same
time,
time,
though,
though,
the the
environment
environment
has has
always
always
earned
earned
a high
a high
place
place
as aas a
rising
rising
risk:risk:
No.No.
10 this
10 this
year,
year,
on aonpar
a par
withwith
concern
concern
about
about
the the
global
global
economy,
economy,
so itsoisit is
obviously
obviouslyon the
on the
radar
radar
screen.
screen.

ThisThis
is aisrisk
a risk
withwith
manymany
angles:
angles:
reputation,
reputation,
litigation
litigation
(banks
(banks
are are
“deep
“deep
pockets”),
pockets”),
pollution
pollution
liability,
liability,
costcost
andand
direct
direct
financial
financial
exposure.
exposure.OneOne
respondent
respondent
listed
listed
climate
climate
change
changeas an
as issue
an issue
thatthat
could
could
complicate
complicate
the the
economic
economicrecovery
recovery
andandmake make
life life
difficult
difficult
for banks
for banks
as well.
as well.

ButButit was
it was
hardhard
to ignore
to ignore
a tone
a tone
of dismissiveness,
of dismissiveness,
eveneven
impatience,
impatience,
in the
in the
responses.
responses.
“Overstated”
“Overstated”
waswas
oneone
comment.
comment.
“At“At
the the
moment,
moment,
whowhocares?”
cares?”
waswas
another.
another.

26.
26.Payment
Paymentsystems
systems
(27)
(27)
LikeLike
the the
backback
office,
office,
thisthis
is an is area
an area
wherewhere
much muchwork
work
has has
beenbeen
donedone
to improve
to improve
speed
speed
andand
reliability,
reliability,
notably
notably
the the
move move
to real-time
to real-timepayment
paymentandand
settlement
settlement
at both
at both
the the
wholesale
wholesale
andandretail
retail
levels.
levels.
AndAndthesethese
havehavestood
stood
up well
up well
during
during
the the
crisis.
crisis.
ButBut
AnAn
area
area
facing
facing moremore
couldcould
always
alwaysbe done
be done
in what
in what
is, after
is, after
all, all,
“the“the
keykey
to financial
to financial
stability”
stability”
in the
in the
words
words
of one
of one
respondent.
respondent.
competition
competition
from
from
non-banks
non-banks OneOneriskrisk
thatthat
waswas mentioned
mentioned waswasthatthat
banksbanks
maymay not not
makemakethe the
mostmost
of the
of the
investment
investment theythey
havehave
put put
intointo
thisthis
area.area.
Payment
Payment
systems
systems
consultant
consultant
NickNick
Collin
Collin
saidsaid
thatthat
“the“the
piecemeal
piecemealdeployment
deployment of ofFaster
Faster
Payments
Payments [the[the
UKUK electronic
electronic
payments
paymentssystem]
system]
has has
meant
meant
thatthat
the the
banking
banking
industry
industry
has has
not not
mademade
as much
as much
out out
of of
thisthis
hugehugeleapleap
forward
forward
in near-real-time
in near-real-time payments
payments
as they
as they
mightmight
havehave
done,
done,
andand
havehave
so far
so not
far not
beenbeen
in ainposition
a position
to build
to build
on the
on the
relatively
relatively
richrich
FPSFPSinfrastructure
infrastructure
withwith
added
addedvalue
value
applications".
applications".

28 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

27.
27.Money
Moneylaundering
laundering
(24)
(24)
OnceOnce
highhigh
on the
on the
riskrisk
agenda
agenda
(it was
(it was
No.No.
11 in112002),
in 2002),
thisthis
Banana
Banana
SkinSkin
is slipping
is slipping
fastfast
withwith
the the
easing
easing
of concern.
of concern.
It has
It has
to be
to said
be said
thatthat
bankers
bankershavehave
never
never
taken
taken
thisthis
riskrisk
as seriously
as seriouslyas non-bankers,
as non-bankers,believing
believing
it toit be
to “got
be “got
up”up”politically.
politically.
ButButnow,now,
non-bankers
non-bankers too too
are are
lessless
worried,
worried,
andandthisthis
yearyear
theythey
put put
it almost
it almost
at the
at the
veryvery
bottom
bottom
of their
of their
list.list.

ManyManyof the
of the
respondents’
respondents’
comments
comments focused
focused
on the
on the
riskrisk
of regulatory
of regulatory
overkill,
overkill,
andand
the the
factfact
thatthat
banksbanks
are are
moremore
vulnerable
vulnerable
to this
to this
Banana
BananaSkinSkin
fromfrom
a reputational
a reputational
thanthan
a financial
a financial
standpoint.
standpoint.
“There
“There
is plenty
is plenty
of regulation
of regulation
in place”
in place”
saidsaid
the the
chairman
chairman of aof a
London
Londonbanking
bankinggroup.
group.

ButBut
regulators
regulators
are are
stillstill
focusing
focusingon it.
onOne
it. One
said:said:
“During
“During
a prudential
a prudential
crisis,
crisis,
thisthis
areaarea
getsgets
lessless
attention,
attention,
hencehence it isit aishigh
a high
risk.”
risk.”
A Russian
A Russian
banker
banker
saidsaid
therethere
waswasa a
temptation
temptationfor for
banksbanks
to turn
to turn
a blind
a blind
eye eye
to money
to money
flows
flows
during
during
recession
recessionwhen
when
deposits
deposits
andand
profits
profits
werewere
under under
pressure.
pressure.

28.
28.Merger
Mergermania
mania(28)
(28)
ThisThis
maymay
not not
be the
be the
timetime
to embark
to embarkon aonmajor
a major
acquisition
acquisition
spree,
spree,
andand
some some
of our
of our
respondents
respondents
eveneven
scoffed
scoffed
at the
at the
idea.idea.
ManyMany
eveneven
pointed
pointed
out out
thatthat
the the
trendtrend
waswas
nownow
towards
towards
demerger
demergeras combinations
as combinations forged
forged
in the
in the
heatheat
of the
of the
crisis
crisis
hadhad
to be
to be
unwound
unwound
for competition
for competition
or other
or other
reasons.
reasons.

ButBut
there
there
is more
is more
to ittothan
it than
that.that.
TheThebanking
banking
system
system
willwill
clearly
clearly
havehave
to undergo
to undergo
some
some
restructuring
restructuring
as the
as the
dustdust
settles:
settles:
rationalisation,
rationalisation,
consolidation,
consolidation,
a shrinkage
a shrinkage
of of
capacity,
capacity,
andand
thisthis
is bound
is bound to require
to require
dealsdeals
to be
to struck,
be struck,
withwith
the the
riskrisk
thatthat
somesome
of of
them
them
willwill
not not
work.
work.

Merger
Mergermania
mania
“could
“could
be induced
be induced
by the
by the
crisis”,
crisis”,
saidsaid
a Swiss
a Swiss
banker.
banker.
It might
It might
eveneven
be healthy.
be healthy.
A Luxembourg
A Luxembourg banker
banker
saidsaid
thatthat
“as “as
longlong
as the
as the
excess
excess
capacity
capacity
in our
in our
industry
industry
is not
is not
reduced
reduced
andand
more
more
closely
closely
adapted
adapted
to client-driven
to client-driven
earnings
earnings
potential,
potential,
we will
we will
see see
continued
continued
risk-taking
risk-taking
drawing
drawinguponupon
market
market
volatile
volatile
earnings
earnings
sources”.
sources”.

29.
29.Too
Toolittle
little
regulation
regulation
(29)
(29)
TheThe
persistently
persistently
lowlowposition
position
of this
of this
Banana
Banana SkinSkin
overover
the the
yearsyears
suggests
suggests
thatthat
the the
riskrisk
in regulation
in regulation
is seen
is seen
to be
to too
be too
much muchof itofrather
it rather
thanthan
too too
little.
little.
ThatThat
remains
remainsthe the
case,
case,
despite
despite
the the
obvious
obviousregulatory
regulatoryfailures
failures
thatthat
led led
to the
to the
crisis.
crisis.
WhileWhile
bankers
bankers
andand
Plenty
Plentyof of non-bankers
non-bankers
put put
thisthis
lowlow
on their
on their
list,list,
regulators
regulatorsplaced
placed
it higher,
it higher,
at No.
at No.
21. 21.
‘blind
‘blind
spots’
spots’
YetYet
therethere
is a isvocal
a vocal
minority
minoritywhichwhich
asserts
asserts
– with– with
understandable
understandable reasons
reasons
– that
– that
we we
ononthethe needneed
more more
regulation,
regulation,
or atorleast
at least
better
better
regulation
regulation which which
oftenoften
amounts
amountsto the
to the
samesame
regulatory
regulatory map
map thing.
thing.
A UK A UK banking
bankingconsultant
consultantwhowho has has
responded
responded to the
to the
CSFI’s
CSFI’s
Banana
BananaSkinsSkins
survey
surveyfor for
many many
years,
years,
hadhad the the
following
following to say:
to say:“Yes,“Yes,
there
there
willwill
be anbe over-
an over-
reaction,
reaction,
but but
fromfroma starting
a starting
pointpoint
thatthat
waswas manifestly
manifestly too too
low.low.
Those
Those
whowholisted
listed
[too[too
muchmuchregulation]
regulation]as the
as the
top top
Banana
Banana
SkinSkinin 2004-6,
in 2004-6, justjust
as the
as the
banking
banking
systemsystem
piled
piled
intointo
toxictoxic
assets
assets
funded
funded
by cheap
by cheapwholesale
wholesale money money andandwithwith
pressure
pressure
to show
to showthatthat
capital
capital
waswasbeing being
usedused
‘economically’,
‘economically’, nownowlooklookabsurd.
absurd.
TheTheproblem
problem
waswasthatthat
there
there
waswas
too too
much muchregulation
regulation
in places,
in places,
but but
too too
littlelittle
of itofcentred
it centred
on prudential
on prudential
issues.”
issues.”

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 29


C S F I / New York CSFI

Other comments included: “More regulation will come and rightly so”, and “Only a
banker would argue there's too much”. Many emphasised the need for better
regulation (more professional, better informed), and for gaps to be plugged in a
string of areas: disclosure, risk management, governance, international coordination,
and specific functions such as derivatives, hedge funds and credit rating agencies.

A strong concern was that the regulatory reform effort would flag, leaving necessary
work undone. One respondent feared that risky deal-making would get going again
“before new regulations and controls can be introduced, together with a failure of
regulators to agree on how to reduce moral hazard across the industry. This means
that a second melt-down cannot yet be ruled out”. Canadian banking consultant John
Pattison feared that governments “will not act to put in place appropriately tighter
regulation in a number of areas. Financial institutions do not like some of these
proposals but for the sector as a whole and institutions of all sizes they are
desirable”.

A number of respondents wanted to see a split created between safe “utility banks”
serving the high street, and “casino banks” dealing in markets. But they feared that
this wouldn’t happen. Andrew Cornford, senior adviser to the Observatoire de la
Finance, a Swiss think tank, said that “regulatory reform will concentrate on
prudential and transactional problems revealed by the crisis, rather than on structural
reforms, in particular the separation of traditional commercial and investment
banking and insurance”.

London’s position at risk


A regulatory over-reaction could damage financial centres, particularly London.

The group corporate strategist of a large City-based institution said his concern was
that “[FSA chairman Lord] Turner's thrashing of the banking sector will reduce
London's position on the global stage to the detriment of the entire UK economy.”

Some also saw the City vulnerable to a crackdown from Brussels. A respondent from
one of the large UK banks said that EU regulations would “force financial institutions
outside the UK, either to become concentrated in the US and Caribbean, or
increasing activity on continental Europe.” A specific concern is the EU’s proposal to
regulate hedge funds and bonuses. A respondent said that “volume and expertise
may be lost from London markets as hedge funds relocate to Zug thanks to EU rules,
and traders move to avoid UK bonus rules.”

Antony Elliott, director of FairBanking in the UK, said that “clear thinking will be
needed to separate the issue of safety for UK banks from that of allowing the City to
flourish.”

30. Competition from new entrants (30)


Although this Banana Skin is at the bottom of the pile, it contains the important
issue of how you stop banks becoming “too big to fail” and make markets more
competitive.

Yes, there are new entrants: supermarket giant Tesco announced plans to step up its
banking presence in the UK as this survey got under way, and at a different level,
Chinese banks are emerging as a force on the world stage.

30 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

‘Too
‘Too
small
small
to to
survive’
survive’
The The
crisis
crisis
has has
shown
shown
thatthat
manymany
banks
banks
are are
too big
too to
bigfail.
to fail.
But But
the the
opposite
opposite
is also
is also
true.true.
ManyMany
respondents
respondents
felt that
felt that
one one
outcome
outcome will be
willabeloss
a loss
of banking
of banking
capacity,
capacity,
particularly
particularly
at the
at the
small small
endend
where
where
banksbanks
havehave
beenbeenleft to
leftsink
to sink
or swim,
or swim,
andand
where
where
survivors
survivors
nownow
faceface
competition
competition
fromfrom
state-supported
state-supportedbehemoths.
behemoths. ThisThis
concern
concern
showed
showed
up inupmany
in many
markets,
markets,including
including
specialised
specialised
onesones
like like
Luxembourg
Luxembourg where where
small
small
banks
banks
feel feel
particularly
particularly
threatened.
threatened.

The The
chiefchief
executive
executive
of aof
Luxembourg
a Luxembourg bankbank
feared
feared
thatthat
“many“many
smallsmall
banksbanks
in the
in the
private
private
banking
banking
business
business
will disappear…because
will disappear…because clients
clients
will have
will have
to gototogosafer
to safer
banks.
banks.
SmallSmall
credit
credit
providers
providers
will also
will also
suffer
suffer
duedue
to liquidity
to liquidity
issues.
issues.
TheseThese
trends
trends
will will
encourage
encourageconsolidation
consolidation
fromfrom
whichwhich
big institutions
big institutions
will benefit”.
will benefit”.
In Australia,
In Australia,
a a
respondent
respondentsawsaw
heavier
heavier
regulation
regulation
“causing
“causing
the demise
the demise of marginal
of marginalplayers”.
players”.

NewNewregulatory
regulatory
costs costs
will also
will also
fall heavily
fall heavily
on small
on small
banks.
banks.
Antony
Antony
Thomlinson
Thomlinsonof City
of City
lawyers
lawyers
Eversheds
Eversheds saidsaid
thatthat
newnewfunding
funding
requirements
requirementspenalised
penalised
smallsmall
banks
banks
“to the
“to the
detriment
detrimentof competition
of competition in the
in the
banking
banking
sector”.
sector”.
DavidDavid
Colvin,
Colvin,
executive
executive
director
director
of of
Jordan
Jordan
International
InternationalBank,Bank,
saidsaid
therethere
waswas
a risk
a risk
thatthat
remedial
remedial
measures
measures“will“will
placeplace
a a
disproportionate
disproportionate burden
burden
on smaller
on smaller
banksbanks
andand
financial
financial
institutions.
institutions.
The The
counterpart
counterpart
to 'too
to 'too
big to
bigfail'
to fail'
is 'too
is 'too
small
small
to survive'
to survive'
whichwhich
will be
willthe
be the
result
result
if the
if the
sinssins
of the
of the
mega-mega-
banksbanks
are are
visited
visited
on the
on small”.
the small”.

ButBut
while
while
thisthis
might
might
be abegood
a good
moment
moment for for
newnew
competitors
competitors
to launch
to launch
business
business
models
models
untainted
untaintedby bythe the
crisis,
crisis,
respondents
respondentsdoubted
doubted
thatthat
theythey
would
would
havehave
the the
stomach
stomach
for for
it. “My
it. “Myconcern
concern
is there
is therewillwill
not not
be real
be real
newnewentrants,”
entrants,”
saidsaid
one.one.
Another
Another
saidsaid
bitterly:
bitterly:
“The“The
realreal
issueissue
is unfair
is unfair
competition
competition fromfrom
state-owned
state-owned
businesses”.
businesses”.

As As
regulation
regulation
getsgets
tighter,
tighter,
the the
barriers
barriers
to entry
to entry
willwill
get get
higher.
higher.
There
There
werewere
“few“few
candidates
candidatesfor for
entry
entry
– and
– and
thosethose
therethere
are are
willwill
findfind
it difficult
it difficult
to get
to get
established
established
in in
the the
faceface
of market
of market
andand
regulatory
regulatory
scepticism”,
scepticism”,saidsaid
a respondent.
a respondent.
Another
Another
observed
observed
thatthat
it was
it was
large,
large,
failed
failed
banks
banks
thatthat
attracted
attracted
capital,
capital,
not not
exciting
exciting
newnew
ones.
ones.

Prof.
Prof.
Michael
MichaelMainelli
Mainelli
of Z/Yen
of Z/Yen Group
Group
saidsaid
the the
keykey
waswas
not not
to reform
to reform
regulation
regulation
but but
to toughen
to toughenup monopoly
up monopoly rulesrules
to encourage
to encouragemoremore
small
small
banks
banks
thatthat
werewere
not not
“too“too
big big
to fail”.
to fail”.
He He said:said:
“The“The
debate
debate
should
should
be about
be about
‘open’
‘open’
markets
markets
rather
rather
thanthan
dogmas
dogmas of ‘free’
of ‘free’or ‘regulated’
or ‘regulated’markets
markets
– breaking
– breakingup up
oligopolies,
oligopolies,
not not
saving
saving
institutions.”
institutions.”
A US A USrespondent
respondent
agreed,
agreed,
but but
waswasnot not
hopeful.
hopeful.
“It “It
would
would
be abevery
a very
goodgood
thingthing
to make
to make financial
financial
activity
activity
moremore
contestable.
contestable.
Smaller
Smaller
institutions,
institutions,
more
more
entry
entry
andandexitexit
... ahh
... ahh
thatthat
would
would
be wonderful!”
be wonderful!”

Jonathan
Jonathan
Howitt,
Howitt,
headhead
of group
of groupriskrisk
at Man
at ManGroup,
Group,
saidsaid
thatthat
increased
increased
protectionism
protectionism
The
The
seeds
seedsof of
thethe andand
regulation
regulation
would would
“stifle
“stifle
the the
market
marketandand
product
productinnovation
innovation
thatthat
we we
needneed
to pull
to pull
next
next
crisis
crisis out out
of the
of the
crisis.
crisis.
Worse
Worsestill,still,
withwithfewerfewer
banks
banksandand
higher
higher
barriers
barriers
to entry,
to entry,
the the
‘may
‘may
already
alreadyhave
have financial
financial
system
systemis far
is far
moremoreconcentrated
concentrated thanthan
it was
it was
before
before
the the
crisis.
crisis.
Hence
Hence
the the
seeds
seeds
of the
of the
nextnext
crisis,
crisis,
evenevenif itifisitaisfew
a few
decades
decadesaway,
away,
maymayalready
already
havehave
beenbeen
been
been
sown’
sown’ sown”.
sown”.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 31


C S F I / New York CSFI

Preparedness
Preparedness
We Weasked
asked
respondents: How
respondents: How
wellwell
prepared
prepared
do you
do you
think
think
the the
sector
sector
is tois handle
to handle
the the
risks
risks
youyou
havehave
identified?
identified?

2008
2008 2010
2009
2009
Poorly
Poorly WellWell Poorly
Poorly
WellWell 4% 4% 9% 9% 11% 11%
24% 24%

Mixed
Mixed
Mixed
Mixed
72%72%
80%80%

OnlyOnly
9 per
9 per
centcent
of respondents
of respondents
thought
thought
banksbanks
werewere
wellwell
prepared,
prepared,
andand
11 per
11 per
centcent
thought
thought
themthem
poorly
poorly
prepared.
prepared.
TheTheremainder
remainder gavegave
a mixed
a mixed
response.
response.
ThisThis
waswas
a a
considerably
considerably
moremore
negative
negative
result
result
thanthan
last last
timetime
whenwhen
24 per
24 per
centcent
saidsaid
“Well”
“Well”
andand
4 4
per per
centcent
saidsaid
“Poorly”.
“Poorly”.
In our
In our
20062006
survey,
survey,
64 per
64 per
centcent
answered
answered
“Well”.
“Well”.

% % WellWell
Mixed
Mixed
Poorly
Poorly
Bankers
Bankers 12 12 81 81 7 7
Bankers
Bankers areare
thethe Observers
Observers 4 4 79 79 17 17
most
mostpositive
positive
Regulators
Regulators 0 0 90 90 10 10
about
abouttheir
their
ability
ability
to to
handle
handle risk
risk A breakdown
A breakdown of the
of the
responses
responses
shows
shows
bankers
bankers
to be
to the
be the
mostmost
positive
positive
about
about
theirtheir
ability
ability
to handle
to handle
risk,risk,
andand
non-bankers
non-bankers
the the
mostmost
negative.
negative.
Although
Although
no regulators
no regulators
thought
thought
banks
banks
werewerewellwell
prepared
prepared
to handle
to handle
risk,risk,
mostmost
of them
of them
gavegave
a mixed
a mixed
response.
response.

Those
Those
whowhoanswered
answered
“Well”
“Well”emphasised
emphasised the the
amount
amount
of work
of work
thatthat
hadhad
beenbeendonedone
to to
strengthen
strengthenbanks
banks
andanddevelop
developbetter
better
riskrisk
controls.
controls.
A typical
A typicalcomment
comment was:was:
“The “The
recent
recent
crisis
crisis
has has
heightened
heightened
the the
sensesense
of awareness
of awareness of, and
of, and
appreciation
appreciation
for, for,
various
various
risks.
risks.
This,
This,
coupled
coupled
withwith
active
active
regulatory
regulatoryoversight,
oversight,
ought
ought
to enable
to enable
the the
sector
sector
withwith
the the
necessary
necessary
mindset
mindset
to manage
to manage the the
keykey
risksrisks
faced
faced
by the
by the
industry.”
industry.”
Those
Thosewhowho
answered
answered“Poorly”
“Poorly”
saidsaid
thatthat
banksbanks
hadhadnot not
learned
learned
the the
lessons
lessons
fromfrom
the the
crisis
crisis
and,and,
if if
anything,
anything,hadhadbecome
become complacent.
complacent. A UKA UK respondent
respondentsaid:said:
“The“The
fundamental
fundamental
discipline
discipline
of fearing
of fearing
bankruptcy
bankruptcy is now
is now
severely
severelydiminished
diminishedfor for
large
large
institutions,
institutions,
leaving
leaving
regulation
regulation
andandpolitical
political
pressure
pressure
to fill
to fill
the the
gap.gap.
ThisThisis not
is not
a viable
a viablewayway
forward.”
forward.”

TheThe
“Mixed”
“Mixed”responses
responses
stressed
stressed
the the
difficulty
difficulty
of generalising
of generalising about
about
a sector
a sector
whichwhich
hadhad
beenbeen
so sharply
so sharply
splitsplit
intointo
winners
winners andand
losers,
losers,
to the
to the
pointpoint
wherewhereit was
it was
nownow
possible
possible
to differentiate
to differentiate
veryveryclearly
clearly
between
between
wellwell
andand
badlybadly
run run
banks.
banks.
OneOnesenior
senior
banker
banker
said:said:
“My“My impression
impression is that
is that
many many
banks
banks
havehave
learned
learned
the the
lesson
lesson
andandare are
focusing
focusing
andand
improving
improving
riskrisk
management,
management, andand
are are
ready
ready
to accept
to accept
lowerlower
profitability
profitability
andand
RoE.RoE.
Unfortunately
Unfortunatelytherethere
are are
stillstill
many many
banks,
banks,
probably
probablyoneone
thirdthird
of theof the
onesones
I I
havehave
talked
talked
to, that
to, that
believe
believethatthat
theythey
did did
nothing
nothing
wrong
wrongandandthatthat
it isitbusiness
is business
as as
usual.”
usual.”

32 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


C S F I / New York CSFI

CSFI
CENTRE FOR THE STUDY OF FINANCIAL INNOVATION
5, Derby Street, London W1J 7AB, UK
Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190

Banking Banana Skins 2010


Each year we ask senior bankers and close observers of the financial scene to describe their main worries
about the banking industry as they look ahead. We’d be very grateful if you would take a few minutes to fill out
this form, and return it to us by December 19th
CSFI, 5 Derby Street, London W1J 7AB, UK
Fax: +44 (0) 20 7493 0190
Email: info@csfi.org.uk

Name Position

Institution Country

Replies are in confidence, but if you are willing to be quoted in our report, please tick

Question 1. Please describe your main concerns about the safety of financial institutions (both
individual institutions and the system as a whole) as you look ahead over the next two to three years.

Please turn over

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 33


C S F I / New York CSFI
Question 2. Here are some areas of risk which have been attracting attention. How do you rate their
severity, and what is their trend: rising, steady or falling? Use the right hand column to add comments.
Insert more risks at the bottom if you wish.
Severity Trend
1=low Rising
5=high Steady Comment
Falling

1 Back office
Big market movements:
2 - commodities
3 - credit spreads
4 - currencies
5 - equities
6 - interest rates
7 Business continuation
8 Capital availability
9 Competition from new entrants
10 Conflicts of interest
11 Corporate governance
12 Credit risk
13 Derivatives
14 Emerging markets
15 Environmental risk
16 Fraud
17 Hedge funds
18 High dependence on technology
19 Liquidity
20 Macro-economic trends
21 Management incentives
22 Merger mania
23 Money laundering
24 Payment systems
25 Political interference
Regulation:
26 - too much
27 - too little
28 Retail sales practices
29 Risk management quality
30 Rogue trader
31

Question 3. How well prepared do you think the sector is to handle the risks you have identified?
Poorly Mixed Well

Comment:

34 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk


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Sponsorship
The CSFI receives general support from many public and private institutions, and that support takes different forms.
In 2009 and early 2010, we received unrestricted financial support from; inter alia:

Citi JPMorgan
Ernst & Young HSBC
ICMA PricewaterhouseCoopers

Abbey Gatehouse Bank


Aberdeen Asset Management HM Treasury
Accenture KPMG
Alliance & Leicester Lloyds TSB / HBOS
APACS LogicaCMG
Aviva London Stock Exchange
Bank of England Man Group
Barclays McKinsey & Co
BERR Morgan Stanley
BT MunichRe
City of London Nomura Institute
Deloitte PA Consulting
Deutsche Bank Prudential plc
Euronext.liffe Reuters
Eversheds Royal Bank of Scotland
Fidelity International Royal London Group
Finance & Leasing Association Ruffer
Fitch Ratings The Law Debenture Corporation
FOA UBS
FRC Z/Yen
FSA Zurich

1776 Consulting LCH Clearnet


ACT LIBA
ACCA Lombard Street Research
Alpheus Solutions London Metropolitan University
Bank of Italy Mobile Financial Service
Banking Code Standards Board NM Rothschild
Brigade Electronics Quest4 Consulting
Centre for Cities Record Currency Management
Chown Dewhurst Semiocraft
CII Serious Fraud Office
Credit Suisse Taiwan FSC
IFSL The Share Centre
Jersey Finance THFC
LandesBank Berlin

We also received special purpose funding from:


- CGAP and Citi (for Microfinance Banana Skins) and;
- PwC (for Banking Banana Skins and Insurance Banana Skins).

In addition, we set up the following fellowship programmes:


- the Generali/CSFI fellowship in Insurance;
- the Visa/CSFI fellowship in European Payments and;
- the DfID/Citi/CSFI fellowship in Development.

The CSFI also received support in kind from, inter alia:


- Financial Times - RUSI
- ifs School of Finance - Linklaters
- NERC - Standard Chartered
- Lovells - Taylor Wessing
- Ruffer - NESTA

UK £25

CSFI
Registered Charity Number 1017353
US $45 Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE
€35 Registered in England and Wales limited by guarantee. Number 2788116

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