Banking banana skins 2012

A global economic report based on a survey of banking experts makes for grim reading, reports Steve Hart

Macro economic risks top the list of worries among bankers around the world, according to a survey by PriceWaterhouseCoopers and the Centre for the Study of Financial Innovation (CSFI).

Its report, Banking Banana Skins 2012, says the move from a banking crisis to a broader set of economic, regulatory and political risks presents a new set of challenges to bank management – namely, politicians.

The report, written by David Lascelles, says there is a chance the global economy will get worse before it gets better.

The “fragile confidence in the [banking] sector is further underlined by the presence of credit risk, liquidity and capital availability,” says the 43-page report.

The main issues highlighted by bankers, banking regulators and close observers of the industry in this survey of 710 people (22 of which were from New Zealand) in 58 countries include:

  • Macro-economic risk – defined as a fragile global economy, poised on the brink of recession
  • Credit risk
  • Liquidity – notably the difficulty that banks, particularly in Europe, are having funding themselves
  • The availability capital

On this last point, the report says pressure to boost their funds (under Basel 3) will lead to a shrinking of their balance sheets and the “exacerbation of the economic downturn”.

In short, banking regulations may squeeze capital out of the market and reduce overall liquidity. The act of putting cash away for a rainy day may well cause a financial drought.

The survey says risk in the global financial system is at a 13-year high, and “anxiety levels are unprecedented” among senior bankers.

“Some of this is what we economists call ‘exogenous’, i.e. out of our control,” says Andrew Hilton of the CSFI.

“But one of the lessons that this survey teaches us, yet again, is the danger of unintended consequences. A few years ago, Basel 3 probably looked like a good idea. Now, it is clear that it is coming along at precisely the wrong time – virtually guaranteeing that big banks will not be able (even if willing) to play the role of economic locomotive that politicians demand of them.

“It is still heretical to say it out loud, but one wonders whether the core idea that the best way to regulate banks is through tougher capital ratios needs to be fundamentally rethought, i.e. abandoned.”

Lascelles says the greatest threat facing the banking industry is the fragility of the world economy.

“Anxiety levels in the financial sector, is at its highest since [the survey] was started 13 years ago. The main causes are obvious: the crisis in the eurozone and mounting debt problems in many of the world’s largest economies, linked to weak banking systems and a scarcity of credit.

“The banking sector’s ability to sustain profitability in a difficult and changing environment is also in doubt.”

The Asia Pacific response in the survey covers a wide variety of economies, including Japan, China, Malaysia, Australia and New Zealand.

The report says concern about the economic outlook across Asia Pacific is strong. There are also worries about the prospects for the region if China slows down.

“Providing, as it does, a counterbalance to the West’s economic weakness and fiscal deficits, China could have a devastating effect if it started to go wrong,” says Lascelles.

“One of those who took part in the survey said: ‘China is slowing and very few banks are really prepared for this; their business plans all call for big expansion in Asia’.

“A particular worry is China’s banking system which is seen to be undercapitalised and threatened by inflated asset prices. It also has a ‘shadow’ banking system which is poorly understood.”

Sir Brian Pearse, former chief executive of the Midland Bank and chairman of the

CSFI, says: “The biggest risk of all is that it will not prove possible to bring about an orderly reduction of borrowing by nations, banks and commercial and individual customers resulting in a major recession.”

Download the full report here: