The banking industry is “under attack from many angles, not just traditional risks but also new uncertainties”.
That’s the word from Dominic Nixon, PwC’s Singapore-based global financial services leader, in the preface to the latest edition of the “Banking Banana Skins” report.
The report, which has just been released by the Centre for the Study of Financial Innovation in New York and accounting firm PwC, dates back to 1996. This year it canvassed the views of 672 of the world’s top bankers, regulators and close observers of the industry across 52 countries asking respondents what’s troubling them in the year ahead and what risks they see facing the industry.
Perhaps surprisingly, with the disruption happening in global banking as technology threatens established business models, the bankers choose an old-style risk as their primary fear. That is, a weak economy saddled with too much debt.
The report said respondents see (our emphasis):
…the greatest threat to the banking industry lies in the possibility that economic recovery will fail because of the huge – and in many cases rising – weight of debt in all the main sectors: sovereign, corporate and consumer. There are also strong concerns about economic weakness in developing economies, and uncertainty surrounding central banks’ monetary policies.
Interesting in light of this fear, “quality of risk management” surged from number 11 on the list of things worrying bankers to number 6.
It’s pretty easy to see in that combination why Australia’s banking regulator has been so hard on Australian banks to either rein in investor lending or hold more capital against their home loan books.
A senior bank regulator was quoted in the survey as saying, “higher indebtedness brings greater financial fragility. Regulators and banks have made some progress in reducing leverage in the banking sector. But it remains high nonetheless. And the increasing indebtedness of borrowers leaves banks vulnerable in the face of economic shocks.”
Criminality rated number two on the list as bankers worry about the growing sophistication and reach of cyber-criminals. Regulation dropped from number one to number three on the list. Banks seem to be getting used to the increased oversight and demand for more capital and liquidity.
Interestingly technology risk rated number four on the list as bankers fretted about “underinvestment and obsolescence, and banks growing exposure to competition from ‘fintech’ companies,” the report noted. No doubt this concern is also related to a new risk that entered the chart with a bullet at number 10, “business model” risk.
The report noted “concern is rising over the viability of bank business models (No. 10) when changing structures, technologies and markets demand constant adaptation”.
Here’s a ranking of the top risks the bankers see in the year ahead: