Political interference greatest risk to banks

The greatest risk now facing the banking industry is not financial but political, according to the latest ‘Banking Banana Skins’ survey

The annual poll of banking risk puts “political interference” at the top of a list of the 30 most serious risks to banks during this period of financial crisis.

The poll, conducted by the Centre for the Study of Financial Innovation (CSFI) in association with PricewaterhouseCoopers, is based on responses from 450 senior figures from the financial world in 49 countries.

Respondents, who include practising bankers as well as close observers of the financial scene and regulators, said that the “politicisation” of banks as a result of bail-outs and takeovers posed a major threat to their financial health.

This view was shared by all types of respondents in all the major banking regions,

though for different reasons. Bankers saw politics distorting their lending decisions. Non-bankers said that political rescues had damaged banks by encouraging reckless attitudes. Regulators worried that governments would withdraw their support from banks before they had time to rebuild their financial strength, precipitating another collapse.

“Political interference” has never appeared as a risk in 15 years of “Banana Skins” surveys. The top risk is closely linked to the No. 3 risk, “Too much regulation”, and the concern that banks will be further damaged by over-reaction to the crisis.

David Lascelles, survey editor, said: “It is ironic that politics should emerge as a risk when the banks had to be rescued in the first place. But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap.”

John Hitchins, UK banking leader, PricewaterhouseCoopers LLP said: “With political interference as the top risk and too much regulation at number three, the concern is that the financial crisis has taken the banking industry’s future out of its own hands. The dash by governments to rescue their banks from disaster may have staved off a collapse of the system, but it has left attitudes to the banking industry deeply politicised. A proportionate response is now needed to avoid damaging the banks’ long term capacity to return public funds and enable them to play their essential role in the wider economy effectively.

“This year’s survey is a well timed warning that the cumulative effect of current regulatory initiatives may have unintended consequences. The need to rebuild trust between banks and regulators is therefore more acute than ever.”

Many of the risks identified by the survey – notably credit risk at No. 2 - stem from concern about the effects of the recession on the banking industry. The bulk of respondents were gloomy about the outlook, fearing a “double dip” recession with a further wave of bad debts hitting the banks. The mood was particularly dark in the Asia Pacific region where respondents are worried that a new asset bubble may burst, bringing about a collapse of confidence in the credit markets.

The poll also reflects concern about the banks’ ability to manage themselves safely. “Banana Skins” such as the quality of risk management, corporate governance and management incentives all feature prominently as potential sources of risk.

But some risks are also seen to be easing as the world pulls out of the crisis. A number of financial risks - liquidity, derivatives, credit spreads and equities – are down on the previous poll in 2008. A striking fall is the risk from hedge funds, down from No. 10 to No. 19, as their threat is seen to diminish. “Financial plumbing” risks are also seen to be low: back office, payments systems etc. All performed well in the crisis. Environmental risk is at an unchanged No. 25 position despite the heat generated by the Copenhagen Summit.