BankingBanking BananaBanana SkinsSkins TheThe CSFICSFI surveysurvey 20152015 ofof bankbank riskrisk

RecoveryRecovery underunder threatthreat

CSFI Centre for the Study of Financial Innovation 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 markets. Trustees Governing Council Sir Brian Pearse (Chairman) Sir Malcolm Williamson (Chairman) David Lascelles Geoffrey Bell (NY) Sir Malcolm Williamson Rudi Bogni Philip Brown Staff Abdullah El-Kuwaiz Director – Andrew Hilton Prof Charles Goodhart Co-Director – Jane Fuller John Heimann (NY) Senior Fellow – David Lascelles John Hitchins Programme Coordinator – Harry Atkinson Rene Karsenti Henry Kaufman (NY) Sir Andrew Large David Lascelles John Plender David Potter Belinda Richards Mark Robson David Rule Carol Sergeant Sir Brian Williamson Peter Wilson-Smith

CSFI publications can be purchased through our website www.csfi.org or by calling the Centre on +44 (0) 20 7621 1056

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

Email: [email protected] Web: www.csfi.org

ISBN: 978-0-9926329-8-4

Printed in the United Kingdom by Heron Dawson & Sawyer CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI C S F I / New York CSFI NUMBER ONE HUNDRED AND TWENTY ONE DECEMBER 2015

Preface

First of all, the CSFI must thank PwC for its continuing support of our Banana Skins reports (both banking and insurance). This is the twelfth in a series of Banking Banana Skins that goes back to 1996 – when “poor management”, “EMU turbulence” and “rogue trader” vied for top spot. We appreciate the financial help that PwC provides – and also the wider distribution of the questionnaire through its own global network. Equally, we also appreciate the fact that PwC lets the chips fall where they may; the results (and the editorialising) are strictly the responsibility of the CSFI.

Second, my thanks must go to the two authors – David Lascelles (the CSFI’s Senior Fellow and the Centre’s co- founder) and Keyur Patel. BBS is a major piece of work, and I am grateful for all the time, effort and judgement they put into it.

That said, I find this year’s results more puzzling than usual – particularly the finding that the top risk is the “macro- economic environment” (which is actually seen as a bigger threat than the top risk in 2014).

True, there has been a great deal of attention recently on China’s economic slowdown – but that is not new. And the US/UK recovery, in particular, seems to be consolidating. I surmise that (although we were very clear as to what we meant by the individual risks we identified) there was a fair amount of conflation in respondents’ minds – the ‘macroeconomic environment’ with ‘credit risk’, ‘risk pricing’ and ‘interest rates’, for instance. Equally, my guess is that, for many respondents, ‘criminality’ and ’technology risk’ overlapped – which would make cyber risk an even more pressing concern than this year’s report suggests it is.

The point is that, throughout this year’s survey, there are highly suggestive findings that one can plausibly agree or disagree with. I am (for instance) surprised that, in a regulatory world dominated by the demands of TLAC, respondents are so relaxed about capital availability. I am also somewhat surprised that concerns over regulation fell this year (albeit only to No 3), when signs of regulatory ‘herding’ (ie a lack of diversity) abound and when banks still face massive financial retribution for their post-2007/08 sins.

But that’s what the BBS survey is all about. You don’t have to agree – or to believe in the salience of the risk landscape exactly as painted by respondents. Rather, BBS is intended to make the reader stop and think – and, perhaps, to adjust his or her behaviour accordingly. By itself it won’t protect against a banking crisis, but it can – at least – provoke a discussion that might protect an individual institution from leaping over the cliff with the rest of the lemmings.

Andrew Hilton Director CSFI

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 1 C S F I / New York CSFI

Sponsor’s foreword

Welcome to Banking Banana Skins 2015, a unique survey of the risks facing the industry, which has been produced by the CSFI in association with PwC.

We are delighted to continue our support for this initiative. The Banana Skins reports provide highly regarded insight to the changing risk concerns of boards and senior management, and how these perceptions change over time. Many of you will be comparing the industry-wide findings against your own assessment of the current and emerging risk environment.

The banking industry is under attack from many angles, not just from traditional risks but also new uncertainties. It is not surprising that in 2015, uncertainties in the macro-economic environment have risen to be the top risk, rising from No. 3 in 2014. Despite prudential reforms, banks remain vulnerable to high debt levels, future interest rates, weakness in China and other emerging markets, and softening commodity prices. Lower growth rates, together with regulatory reforms will put pressure on banks to manage returns.

The sharpest rise in concern in 2015 was about criminality (including the risks to banks in areas such as money laundering, tax evasion and cyber attack) which rose from No. 9 in 2014 to No. 2 in 2015. This risk coupled with continued concern on technology risk (No. 4) where underinvestment and obsolescence, as well as the boom in new “fintech” present major challenges to banks.

Criminality and technology risk are becoming increasingly concerns of banks given the rise in new competitors who are challenging traditional ways of doing things and operate using more nimble systems and lower overheads. Traditional bank earnings models are starting to be threatened as these competitors chip away at many traditional way of doing things. To help them improve margins, banks are experimenting with new industry models which leverage on technology and focus more on customer centricity and less on products; however this could expose them to even higher risks in the areas of cyber crime and financial terrorism.

Not surprising, regulation remains the No. 3 Banana Skin for banks in 2015. Whilst banks recognise the need for tougher controls, many question their cost and effectiveness. Banks are not only bearing the direct costs of regulation – new capital and liquidity requirements, restructuring costs, the impact of market conduct requirements (including potential regulatory fines), higher costs of compliance, and higher costs of customer acquisition; but also the cost of greater management time to re-engineer processes, change culture and increase compliance efficiency. Industry margins are being impacted.

We would like to thank all the participants in the survey for sharing their valuable insights and thank the CSFI for the richness of insight and perceptive comment in this report. I trust you find Banking Banana Skins 2015 useful and thought-provoking. If you have any feedback or would like to discuss any of the issues raised in more detail, please do not hesitate to contact me.

Dominic Nixon Global FS Risk Leader, PwC Singapore [email protected]

2 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

Contents

About this survey ...... 4 Summary ...... 5 Who said what ...... 9 Preparedness ...... 11 The Banana Skins ...... 12 Appendix 1: A closer look at the numbers ...... 34 Appendix 2: The changing face of risk 1996-2015...... 36

This report was written by David Lascelles and Keyur Patel

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 3 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 September and October 2015, and received 672 responses from individuals in 52 countries. The questionnaire 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 score a list of potential risks, or Banana Skins, selected by a CSFI/PwC panel. 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 respondents by type was:

38% 37% Bankers

Risk managers and regulators Observers

25%

The breakdown by countries was as follows:

Argentina 1 Hong Kong 14 Portugal 8 Australia 13 India 5 Russia 12 Austria 2 Indonesia 19 Saudi Arabia 2 Azerbaijan 4 Iran 2 Singapore 23 Belgium 24 Ireland 2 Slovakia 11 Brazil 30 Italy 1 South Africa 14 Canada 34 Japan 5 Spain 3 Cayman Islands 11 Luxembourg 28 Sweden 3 China 34 Malaysia 12 Switzerland 2 Croatia 7 Malta 1 Taiwan 2 Cyprus 1 Mexico 40 Thailand 3 Czech Republic 5 Netherlands 9 Turkey 74 Denmark 1 New Zealand 25 Uganda 1 Dominican Rep. 1 Nigeria 12 UK 113 France 4 Panama 1 UAE 1 Germany 5 Peru 8 Uruguay 1 Greece 7 Philippines 4 USA 20 Poland 7

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C S F I / New York CSFI

SummarySummary ThisThis report report describes describes the the risk risk outlook outlook for for the the bank bankinging industry industry in in the the final final quarter quarter of of 20152015 – –a atime time when when the the global global economy economy and and its its banki bankingng system system were were in in the the advancedadvanced stages stages of of recovery recovery from from the the financial financial crisis, crisis, but but when when concerns concerns were were growinggrowing about about the the strength strength of of that that recovery. recovery.

TheThe findings findings are are based based on on responses responses fromfrom 672672 bankers,bankers, regulatorsregulators andand closeclose observersobservers ofof thethe bankingbanking BankingBanking Banana Banana Skins Skins scenescene in in 52 52 countries. countries. In In the the opinion opinion 20152015 ofof thesethese respondents,respondents, thethe greatestgreatest (2014(2014 ranking ranking in in brackets) brackets) threatthreat to to the the banking banking industry industry lies lies in in thethe possibilitypossibility thatthat economiceconomic 1 1 Macro-economicMacro-economic environment environment (3) (3) recoveryrecovery will will fail fail because because of of the the 2 2 CriminalityCriminality (9) (9) hugehuge - -and and in in many many cases cases rising rising - - weightweight ofof debtdebt inin allall thethe mainmain 3 3 RegulationRegulation (1) (1) sectors:sectors: sovereign,sovereign, corporatecorporate andand 4 4 TechnologyTechnology risk risk (4) (4) consumer.consumer. ThereThere areare alsoalso strongstrong 5 5 PoliticalPolitical interference interference (2) (2) concernsconcerns about about economic economic weakness weakness 6 6 QualityQuality of of risk risk management management (11) (11) inin developingdeveloping economies,economies, andand FailureFailure of of the the uncertaintyuncertainty surroundingsurrounding centralcentral 7 7 CreditCredit risk risk (7) (7) globalglobal recovery recovery is is banks'banks' monetary monetary policies. policies. 8 8 ConductConduct practices practices (16) (16)

9 9 PricingPricing of of risk risk (6) (6) thethe greatest greatest risk risk AA senior senior banking banking supervisor supervisor said: said: “Higher“Higher indebtedness indebtedness brings brings greater greater 1010 BusinessBusiness model model (-) (-) financialfinancial fragility.fragility. RegulatorsRegulators andand 1111 SocialSocial media media (19) (19) banksbanks have have made made some some progress progress in in 1212 ReputationReputation ( -()- ) reducingreducing leverageleverage inin thethe bankingbanking sector.sector. ButBut itit remainsremains highhigh 1313 CapitalCapital availability availability (10) (10) nonetheless.nonetheless. AndAnd thethe increasingincreasing 1414 InterestInterest rates rates (12) (12) indebtednessindebtedness ofof borrowersborrowers leavesleaves 1515 EmergingEmerging markets markets (17) (17) banksbanks vulnerablevulnerable inin thethe faceface ofof 1616 ShadowShadow banking banking (20) (20) economiceconomic shocks.” shocks.” 1717 CurrencyCurrency (22) (22) GivenGiven suchsuch views,views, oneone ofof thethe 1818 LiquidityLiquidity (15) (15) strongeststrongest risks risks is is concern concern about about the the 1919 CorporateCorporate governance governance (8) (8) qualityquality ofof banks'banks' riskrisk manage-manage- ment,ment, which which rose rose from from No. No. 11 11 in in 2020 ManagementManagement incentives incentives (21) (21) 20142014 toto No.No. 6 6 inin thisthis survey.survey. 2121 DerivativesDerivatives (18) (18) AlthoughAlthough much much work work has has been been done done 2222 HumanHuman resources resources (23) (23) byby banksbanks andand theirtheir regulatorsregulators toto strengthenstrengthen risk risk controls, controls, there there is is a a 2323 RelianceReliance on on third third parties parties (24) (24) sensesense thatthat banksbanks havehave stillstill notnot 2424 SustainabilitySustainability (25) (25) adequatelyadequately addressedaddressed notnot justjust thethe scalescale of of risk risk but but also also its its changing changing nature.nature.

TheThe changing changing nature nature of of risk risk is is summed summed up up by by the the sha sharprp rise rise in in concern concern about about criminalitycriminality (up (up from from No. No. 9 9to to No. No. 2), 2), chiefly chiefly because because of of the the a larmingalarming spread spread of of cyber-crimecyber-crime in in an an increasingly increasingly borderless borderless market, market, particularly particularly data data theft. theft. This This is is closelyclosely associatedassociated withwith technologytechnology riskrisk (No.(No. 4)4) wherewhere underinvestmentunderinvestment andand obsolescence,obsolescence, andand banks'banks' growinggrowing exposureexposure toto competcompetitionition fromfrom “fintech”“fintech” companies,companies, now now present present major major challenges. challenges.

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AnotherAnother strong strong riser inriser the in area the ofarea risk of managementrisk management is conduct is conduct practices practices (up from (up from No. 16No. to 16 No. to 8)No. because 8) because of what of whatis perceived is perceived to be tothe be banks' the banks' failure failure to achieve to achieve “culture“culture change” change” in the in managementthe management of their of theirbusines business practicess practices despite despite strong strong regulatoryregulatory pressure pressure and heavyand heavy fines. fines. One Onebanker banker described described unethical unethical business business practicespractices as a “perennialas a “perennial risk [which]risk [which] won’t won’t go away go awayas we as make we make money money out ofout of peoplepeople who don'twho don'tpay money pay money back”. back”.

Even Evenso, reputationso, reputation risk riskdid notdid ranknot rankas high as highas might as might be expected be expected (No. (No.12) 12) becausebecause of the of view the viewthat thisthat is this one is risk one torisk which to which there thereis little is littledownside. downside. Political Political interferenceinterference in banking in banking is seen is toseen be todeclining be declining (down (down from fromNo. 2 No. last 2 year last toyear No. to 5) No. 5) and excessiveand excessive regulation regulation, long, longa high-ranking a high-ranking risk, risk,slipped slipped from fromthe top the po topsition position last yearlast toyear No. to 3. No. The 3. mostThe mostthreatening threatening riser inriser this in area this isarea social is social media media (up from (up from No. 19No. to 19No. to 11) No. with 11) itswith power its power to damage to damage bank bankreputations reputations with orwith without or without sound sound evidence.evidence.

A numberA number of risks of riskswhich which were wereassociated associated with thewith fi thenancial financial crisis crisishave havecontinued continued to to CentralCentral banks banks will will recede.recede. Among Among them themare the are pricing the pricing of risk of (i.e.risk aggressive (i.e. aggressive under-pricing under-pricing to achieve to achieve competitivecompetitive advantage) advantage) which which went wentdown down from fromNo. 6No. to No.6 to 9,No. the 9, availability the availability of of makemake sure sure banks banks capitalcapital to strengthen to strengthen bank bankbalance balance sheets sheets (down (down from fromNo. 1No.0 to 1 0No. to 13),No. and13), and havehave enough enough liquidityliquidity risk (downrisk (down from fromNo.15 No.15 to No. to 18) No. because 18) because of the of commitme the commitment by ntcentral by central liquidityliquidity banksbanks to keep to keepfunding funding markets markets afloat. afloat. Interest Interest rate riskrate wasrisk alsowas lowalso atlow No. at 14No. 14 despitedespite the long the longanticipated anticipated end toend quantitative to quantitative easing: ea sing:banks banks have havehad plentyhad plenty of of time totime prepare to prepare for it, for though it, though it will it be will a firstbe a t firstime experiencetime experience for the for industry the industry and its and its impactimpact cannot cannot be predicted be predicted with anywith certainty. any certainty.

Two Twonotable notable risers risers are emergingare emerging markets markets (up from(up fromNo. 17No. to 17 No. to 15)No. where15) where concernconcern focuses focuses on the on prospects the prospects for China for China and theand impact the impact of weak of weakcommodity commodity pricesprices on a stringon a string of dependent of dependent economies, economies, and shadow and shadow banking banking (up from (up fromNo. 20 No. to 20 to No. 16),No. the16), unregulated the unregulated (and therefore(and therefore potentially potentially dangerous) dangerous) para-financial para-financial sector sector whosewhose growth growth is seen is toseen be tofuelled be fuelled by excessive by excessive regulation regulation of mainstream of mainstream suppliers. suppliers.

InstitutionalInstitutional risks risksto banks to banks show showa mixed a mixed trend. trend. The goodThe goodnews newsis that is thethat risk the ofrisk of poor poorcorporate corporate governance governance has fallenhas fallen sharply sharply from fromNo. 8No. to 8No. to 19No. following 19 following recentrecent improvements, improvements, though though there thereis a thread is a thread of co ncernof concern that boards that boards may nomay longer no longer be physicallybe physically capable capable of staying of staying on top on of top issues of issues in their in theirincreasingly increasingly complex complex and and fast-movingfast-moving institutions. institutions. The badThe news bad newsis that is conc that ernconc isern rising is rising over theover viability the viability of of bankbank business business models models (No. (No.10) when10) when changing changing structures, structures, technologies technologies and and marketsmarkets demand demand constant constant adaptation. adaptation.

WorthyWorthy of commentof comment among among the verythe verylow lowranked ranked risks risksis sustainability is sustainability, or , or environment-associatedenvironment-associated risk, risk,at No. at 24.No. Although 24. Although a number a number of respondents of respondents saw asaw a connectionconnection between between banks banks and theirand theirpotentially potentially expo sedexpo clientssed clients here, here,the broadthe broad perceptionperception is that is banks that banks have havelittle tolittle fear to from fear fromenvironmental environmental threats, threats, and would, and would, in in any case,any case,be able be toable adapt. to adapt.

6 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

Risers and fallers

The dramatic changes in the global banking industry areare reflectedreflected inin equally sharp shifts in risk perceptions. Here is a selection of risks whose ranking has altered markedly since 2014.

Concern about the RISING RISKS quality of banks' Macro-economic environment: fearsfears aboutabout thethe strengthstrength ofof thethe risk management recoveryrecovery Criminality:: alarmingalarming riserise inin cybercyber crimecrime andand fraud.fraud. isis risingrising Conduct practices:: lacklack ofof "culture"culture change"change" inin banksbanks maymay bebe perpetuating bad old ways. Social media:: thethe risingrising threatthreat toto bankbank reputationsreputations fromfrom populapopularr electronic networks.

FALLING RISKS

Corporate governance:: muchmuch workwork hashas beenbeen donedone toto improveimprove thethe wayway banks are run. Pricing of risk:: AA lulllull inin "silly"silly pricing"pricing" whichwhich may,may, however,however, bebe temporary.temporary. Capital availability:: PlentyPlenty ofof capitalcapital available,available, particularlyparticularly forfor thothose who don't need it. Liquidity:: CentralCentral banksbanks willwill ensureensure therethere areare nono fundingfunding crcrises.ises. Derivatives:: TradingTrading ofof exoticexotic productsproducts nownow underunder tightertighter contcontrol.rol.

Types of response A breakdown of responses by typetype showsshows thatthat allall majormajor respondentrespondent groupsgroups (bankers,(bankers, observers and risk managers) are strongly concerned aboutabout thethe statestate ofof thethe globalglobal economyeconomy andand regulatoryregulatory excess.excess. ImportantImportant pointspoints ofof difference come in their attitudesattitudes towardstowards institutionalinstitutional risk.risk. Non-bankerNon-banker respondentsrespondents generallygenerally believebelieve thatthat banks are more vulnerable to operational risks such as criminality, technology, conductconduct practicespractices andand reputationreputation thanthan thethe bankersbankers tthemselves where the focus is more on external pressures, such as political interference.ference.

A breakdown of responses by regionregion showsshows thatthat thethe macro-economicmacro-economic outlookoutlook dominates concerns around the world, except in North America where it ranks No. 2, possibly because of the stronger recovery in the US.US. TheThe risingrising risksrisks fromfrom criminalitycriminality werewere thethe NorthNorth Americans'Americans' toptop concern,concern, andand alsoalso rankedranked highhigh inin otherother regions.regions. OtherwiseOtherwise therethere waswas aa fairlyfairly strongstrong globalglobal consensusconsensus thatthat thethe mainmain threatsthreats toto banking safety come from areas such as technology risk,isk, creditcredit riskrisk andand conductconduct practices.

Preparedness We asked respondents how well prepared they thought banksbanks werewere toto dealdeal withwith thethe risksrisks identifiedidentified byby thethe surveysurvey onon aa scalescale wherewhere 5=w5=wellell preparedprepared andand 1=poorly1=poorly prepared. The result was 3.13, slightly better than thethe 3.043.04 scoredscored inin 2014,2014, andand continuingcontinuing aa risingrising trendtrend sincesince thethe peakpeak ofof thethe finfinancialancial crisis.crisis. BankersBankers ratedrated theirtheir preparedness higher than non-bankers. Geographically perceptions of preparedness were strongest in the Far East Pacific followed by North America and Europe.

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BananaBanana Skins Skins Index Index The BananaThe Banana Skins Skins Index Index tracks tracks survey survey responses responses over overtime timeand canand be can read be asread an as an indicatorindicator of changing of changing anxiety anxiety levels. levels. The upper The upper line shows line shows the average the average score score(out of(out of five) five)given given to the to top the risk, top andrisk, theand bottom the bottom line showsline shows the average the average of all of the all risks. the risks. This Thisyear, year,the top the risk top -risk macro-economic - macro-economic risk -risk has -risen, has risen, but the but overall the overall trend, trend, as as shownshown by the by average the average of all of the all risks, the risks, extends extends the downward the downward path itpath began it began in 2014. in 2014. HoweverHowever overall overall anxiety anxiety is still is higher still higher than pre-crthan pre-crisis. isis.

'Anxiety'Anxiety Index' Index' continuescontinues to to improveimprove

A closerA closer look lookat the at numbers the numbers A closerIn our look Banana at the Skinsnumbers. survey, In our respondents Banana Skins score s urvey,each r iskrespondents from 1-5, scorewhere each 5 is the risk frommost 1-5,severe. where A detailed5 is the breakdownmost severe. of A the detail ratingsed breakdown is revealing of (seethe ratingsAppendix is 1). revealingWe found:(see Appendix 1). We found:

• Anxiety• Anxiety is growing is growing at the at top the oftop the of rankings the rankings but recedingbut receding elsewhere. elsewhere. The The top clustertop cluster of risks of risksthis year this wereyear wereseen asseen more as moresevere se thanvere inthan 2014 in 2014but from but fromNo. No. 5 downwards5 downwards the reverse the reverse is true is – true which – which suggests suggests that outside that outside the main the mainthreats threats to to the industry,the industry, the picture the picture is improving. is improving.

• A• regional A regional breakdown breakdown reveals reveals the same the same average average level levelof anxiety of anxiety about about risks, risks, but widelybut widely different different preparedness. preparedness. Respondents Respondents from fromthe Far the East Far PacificEast Pacific were were muchmuch more moreoptimistic optimistic about about their theirability ability to face to theseface theserisks risksthan thanthose thosefrom from Europe,Europe, with Northwith North America America in between. in between.

• The• outlookThe outlook of risk of managersrisk managers is now is closernow closer to obser to observers thanvers thanbankers bankers, both, both in termsin terms of the of severity the severity of risks of risksfaced faced and the and ind theustry’s industry’s ability ability to deal to withdeal them.with them. In 2014In 2014risk managers risk managers were weremore moreclosely closely aligned aligned with practitioners.with practitioners.

• Bankers• Bankers and observersand observers disagree disagree most mostabout about the sever the severity ofity operating of operating and and governancegovernance risks, risks, the formerthe former group group being being much much less anxiousless anxious than thanthe latterthe latter aboutabout threats threats that thatindividual individual institutions institutions have havemor e morinfluencee influence over. over.Risk Risk managersmanagers tended tended to fall to in fall between. in between.

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WhoWho said said what what

A breakdownA breakdown of responses of responses by type by typeand andgeography geography show shows importants important differences differences in in risk perceptions.risk perceptions.

BankersBankers – commercial – commercial and and investment investment bankers bankers

1 Macro-economic1 Macro-economic envt. envt. BankersBankers see the see uncertain the uncertain economic economic outlook outlook 2 Regulation2 Regulation as theas biggest the biggest threat threat to their to their prospects. prospects. But But they theycontinue continue to worry to worry about about risks risks that havethat have 3 Political3 Political interference interference dominateddominated their their thinking thinking since since the peak the peak of of 4 Criminality4 Criminality the crisis,the crisis, those those of excessive of excessive regulation regulation and and AreAre bankers bankers 5 Technology5 Technology risk risk politicalpolitical interference. interference. Reputation Reputation risk isrisk also is also under-playingunder-playing 6 Credit6 Credit risk risk high highfor them. for them. They They are increasingly are increasingly concernedconcerned about about rising rising cyber cyber crime crime and theand the conductconduct of of 7 Capital7 Capital availability availability needneed to stay to stayon top on of top technology of technology changes. changes. businessbusiness risk? risk? 8 Pricing8 Pricing of risk of risk TheyThey recognise recognise that thethat quality the quality of their of their risk risk 9 Quality9 Quality of risk of riskmgt. mgt. managementmanagement needs needs improvement. improvement. A notable A notable 10 10Reputation Reputation absenteeabsentee from from the top the ten top is ten conduct is conduct of of businessbusiness risk whichrisk which came came No. 8No. overall. 8 overall. Observers Observers – analysts, – analysts, consultants, consultants, academics, academics, service service

providers1 providersMacro-economic1 Macro-economic envt. envt. ObserversObservers of the of banking the banking industry industry took tooka a 2 Criminality2 Criminality strikinglystrikingly different different view view of the of risk the risk outlookoutlook from from bankers. bankers. While While they theyshared shared 3 Regulation3 Regulation bankers'bankers' top concerns top concerns with withthe macro- the macro- 4 Technology4 Technology risk risk economy,economy, they theyplaced placed a number a number of risks of risks at at 5 Conduct5 Conduct practices practices a highera higher level, level, including including criminality, criminality, 6 Quality6 Quality of risk of riskmgt. mgt. technology,technology, conduct conduct practices, practices, quality quality of of risk management,risk management, reputation reputation and theand the 7 Political7 Political interference interference viabilityviability of banking of banking models. models. These These are all are all 8 Reputation8 Reputation close-to-homeclose-to-home risks risks which which outsiders outsiders to the to the 9 Business9 Business model model businessbusiness may mayfind findeasier easier to evaluate. to evaluate. 10 10Social Social media media

RiskRisk managers managers – people – people who who work work in risk in riskmanagement, management, includingincluding regulators regulators

1 Macro-economic1 Macro-economic envt. envt. PeoplePeople in the in business the business of risk of managementrisk management 2 Regulation2 Regulation sharedshared the general the general concern concern about about the macro- the macro- economiceconomic outlook, outlook, and theand possibly the possibly 3 Criminality3 Criminality damagingdamaging effect effect of excessive of excessive regulation. regulation. But But 4 Technology4 Technology risk risk mostmost of the of risks the risks on their on their top list top are list ones are ones 5 Credit5 Credit risk risk whichwhich are within are within the banks' the banks' capacity capacity to to 6 Conduct6 Conduct practices practices control:control: criminality, criminality, technology, technology, credit, credit, the the pricingpricing of risk of andrisk conductand conduct practices, practices, even even 7 Political7 Political interference interference the qualitythe quality of risk of managementrisk management itself. itself. Of all Of all 8 Quality8 Quality of risk of riskmgt. mgt. the majorthe major respondent respondent categories, categories, they theywere were 9 Pricing9 Pricing of risk of risk the mostthe most concerned concerned about about the future the future path pathof of 10 10Interest Interest rates rates interestinterest rates rates

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EuropeEurope

11 Macro-economicMacro-economic envt. envt. HavingHaving contributed contributed almost almost half half of of this this year’s year’s 22 RegulationRegulation responses,responses, Europe’s Europe’s rankings rankings largely largely mirrored mirrored thethe global global results. results. Economic Economic uncertainty, uncertainty, 33 CriminalityCriminality especiallyespecially in in the the eurozone, eurozone, led led the the list list of of 44 PoliticalPolitical interference interference concerns,concerns, but but was was closely closely followed followed by by higher higher 55 TechnologyTechnology risk risk thanthan average average anxiety anxiety about about public public 66 ReputationReputation environmentenvironment risks: risks: regulation, regulation, political political interferenceinterference and and reputation. reputation. The The related related risks risks 77 PricingPricing of of risk risk aroundaround criminality criminality and and technology technology also also 88 ConductConduct practices practices featuredfeatured prominently. prominently. 99 CapitalCapital availability availability 1010 BusinessBusiness model model

FarFar East East Pacific Pacific

11 Macro-economicMacro-economic envt. envt. TheThe weakness weakness of of China China and and concerns concerns about about 22 TechnologyTechnology risk risk thethe future future of of quantitative quantitative easing easing meant meant the the macro-economicmacro-economic environment environment was was by by some some 33 CriminalityCriminality distancedistance viewed viewed as as the the biggest biggest risk risk in in the the Far Far 44 CreditCredit risk risk EastEast Pacific Pacific area. area. This This was was also also the the only only 55 ConductConduct practices practices regionregion to to have have interest interest rates rates in in its its top top ten. ten. 66 QualityQuality of of risk risk mgt. mgt. TechnologyTechnology was was another another notable notable threat, threat, includingincluding cybercrime cybercrime and and social social media, media, while while 77 RegulationRegulation conductconduct practices practices ranked ranked higher higher than than average. average. 88 SocialSocial media media ButBut there there was was less less emphasis emphasis on on public public 99 CapitalCapital availability availability environmentenvironment risks, risks, including including regulation. regulation. 1010 InterestInterest rates rates

NorthNorth America America

11 CriminalityCriminality TheThe perceived perceived threat threat of of cybercrime cybercrime dominated dominated CriminalityCriminality topstops 22 Macro-economicMacro-economic envt. envt. thethe view view in in North North America, America, coming coming ahead ahead of of concernsconcerns about about the the macro-economy, macro-economy, possibly possibly 33 RegulationRegulation concernsconcerns inin NorthNorth becausebecause of of the the strength strength of of the the US US recovery. recovery. AmericaAmerica 44 TechnologyTechnology risk risk ThereThere was was also also an an emphasis emphasis on on competition competition 55 PoliticalPolitical interference interference fromfrom non-traditional non-traditional entrants entrants to to the the banking banking 66 SocialSocial media media sector,sector, with with the the risks risks around around technology, technology, businessbusiness models models and and shadow shadow banking banking all all 77 ReputationReputation makingmaking the the top top ten. ten. On On the the other other hand, hand, risks risks 88 BusinessBusiness model model relatedrelated to to governance governance were were rated rated lower lower than than 99 ShadowShadow banking banking thethe global global average. average. 1010 ConductConduct practices practices

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PreparednessPreparedness

We askedWe askedrespondents respondents how wellhow preparedwell prepared they thoughtthey thought banks banks were wereto handle to handle the the risks thatrisks lie that ahead, lie ahead, on a scaleon a scalewhere where 5=well 5=well prepa redprepa andred 1=poorly and 1=poorly prepared. prepared. The The averageaverage score scorewas 3.13, was 3.13,signalling signalling more moreoptimism optimism than thethan 3.04 the score3.04 scorewe recorded we recorded in 2014.in 2014.

A breakdownA breakdown by type by typeof respondent of respondent shows shows that bankerthat bankers rateds ratedtheir theirlevel levelof of preparednesspreparedness higher higher than riskthan managers,risk managers, with observwith observers ofers the of industry the industry the most the most pessimisticpessimistic group. group.

Total Total 3.13 3.13

BankersBankers 3.24 3.24 Risk managersRisk managers 3.15 3.15 ObserversObservers 3.00 3.00

A regionalA regional breakdown breakdown reveals reveals that preparedness that preparedness was seen was to seen be betterto be betterin the inFar the East Far East PacificPacific region region than Europe, than Europe, with North with North America America in between. in between.

BanksBanks are are Far EastFar PacificEast Pacific 3.23 3.23 seenseen to be to be North NorthAmerica America 3.13 3.13 EuropeEurope 3.09 3.09 betterbetter prepared prepared Respondents’Respondents’ views views on preparedness on preparedness

2/5: The2/5: size The and size complexity and complexity of the of largest the largest banks banks rende rsrende themrs theminflexible inflexible and 'too and 'too big tobig govern' to govern' in such in sucha dynamic a dynamic marketplace. marketplace. Significant Significant shocks shocks are inevitable are inevitable given giventhe plethora the plethora of risks of identified,risks identified, many manybeing beingnew challenges. new challenges. Observer, Observer, UK UK

2/5: The2/5: biggestThe biggest banks banks are bigger are bigger than inthan 2007. in 2007.They Theyare almost are almost as complex as complex and and interconnectedinterconnected as in as2008. in 2008.Leverage Leverage is lower is lower but re butmains remains excessive. excessive. They Theyhave have politicalpolitical supporters supporters but the but public the public would would welcome welcome their comeuppance.their comeuppance. Not a Not good a good situationsituation in an uncertainin an uncertain world. world. Observer, Observer, USA USA

3/5: Many3/5: Many areas areasof bank of riskbank management risk management have improvedhave improved for the for better, the better, which which has has made madethe system the system sounder. sounder. However, However, new risksnew arerisks eme arerging eme rgingfor which for which there thereis no is no historicalhistorical experience experience that can that be can drawn be drawn on to onassis tot assiswitht change.with change. Many Many new risksnew risks remainremain relatively relatively unmanaged. unmanaged. Banker, Banker, New ZealandNew Zealand

3/5: Banks3/5: Banks are prepared are prepared but the but lack the oflack a clear of a viewclear ofview upcoming of upcoming changes changes does notdoes not allow allowthem tothem fully to anticipatefully anticipate potential potential issues. issues. Risk manager,Risk manager, Luxembourg Luxembourg

4/5: With4/5: Withthe exception the exception of new of technologiesnew technologies and cyberand cyberattacks, attacks, banks banks are well are well prepared.prepared. The newThe rulesnew rules(Basel (Basel III) supportIII) support much muchof this of preparation.this preparation. Banker, Banker, MexicoMexico

4/5: Increased4/5: Increased capital capital provision provision will help will onhelp some on someof the of endemic the endemic risks. risks.Banks Banks are are vulnerablevulnerable to their to owntheir politicalown political blind blindspots, spots, external external political political uncertainties, uncertainties, and and rapidlyrapidly changing changing technologies. technologies. Observer, Observer, UK UK

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1.1. Macro-economic Macro-economic environment environment (3) (3) TheThe risk risk that that economic economic conditions conditions could could damage damage banks, banks, for for example example through through uncertainuncertain recovery recovery or or the the growth growth of of asset asset bubbles bubbles

TheThe uncertainties uncertainties in in the the macro-economic macro-economic environment environment present present the the main main threat threat to to the the recoveryrecovery of of the the global global banking banking system, system, according according to to this this year's year's Banana Banana Skins Skins survey survey ofof banking banking risk. risk. This This marks marks a achange change in in perceptions perceptions. In. In 2014, 2014, macro-economic macro-economic risk risk camecame No. No. 3 3(behind (behind excessive excessive regulation regulation and and politic politicalal interference). interference). Its Its move move to to the the toptop reflects reflects growing growing concerns concerns about about the the weakness weakness of of the the economic economic recovery recovery and and its its apparentapparent failure failure to to take take firm firm root. root.

ThereThere are are many many reasons reasons for for this: this: the the high high level level of of debt debt that that persists persists in in all all the the main main sectorssectors around around the the world: world: sovereign, sovereign, corporate corporate and and consumer, consumer, plus plus the the big big question question markmark over over the the future future of of quantitative quantitative easing easing and and int interesterest rates. rates. The The weakness weakness of of China China andand other other emerging emerging markets markets adds adds another another layer layer of of ri sk.risk. Softening Softening commodity commodity prices prices andand the the growing growing threat threat of of disruption disruption through through cyberc cybercrimerime are are further further factors. factors.

ConcernConcern about about macro-economic macro-economic risk risk was was particularly particularly marked marked in in Europe Europe because because of of GlobalGlobal growth growth is is unsettledunsettled conditions conditions in in the the eurozone, eurozone, and and to to a sliga slightlyhtly lesser lesser extent extent in in North North America America onlyonly happening happening becausebecause of of the the QE QE question. question. Macro-economic Macro-economic risk risk was was also also the the top top concern concern for for all all typestypes of of respondent respondent (bankers, (bankers, risk risk managers managers and and obs observers).ervers). becausebecause of of artificialartificial TheThe fact fact that that many many economies economies have have now now returned returned to to p ositivepositive growth growth does does not not appear appear toto be be softening softening these these concerns: concerns: indeed indeed it itseems seems to to reinforce reinforce the the view view that that growth growth is is conditionsconditions onlyonly occurring occurring because because of of the the artificial artificial conditions conditions created created by by abnormally abnormally low low interestinterest rates, rates, and and could could easily easily fail fail as as asset asset bubb bubblesles burst burst at at a atime time when when central central banksbanks have have run run out out of of monetary monetary ammunition. ammunition. Many Many res respondentspondents spoke spoke of of the the global global economy'seconomy's vulnerability vulnerability to to “shocks” “shocks” of of both both the the fin financialancial and and natural natural kinds, kinds, and and the the prospectsprospects of of recession/deflation. recession/deflation. A A senior senior credit credit a nalystanalyst at at one one of of the the leading leading rating rating agenciesagencies said: said: “The “The onset onset of of interest interest rate rate normalis normalisationation in in some some countries, countries, the the China China slowdownslowdown andand thethe unresolvedunresolved EuromessEuromess allall havehave significantsignificant potentialpotential forfor instability.”instability.”

BanksBanks are are highly highly vulnerable vulnerable to to all all these these developmen developments tsthrough through their their exposure exposure to to debt debt andand their their need need for for liquidity. liquidity. The The senior senior vice-presi vice-presidentdent of of regulatory regulatory risk risk at at a alarge large CanadianCanadian bank bank warned warned that that “the “the low low rate, rate, low low growth growth environment environment is isgoing going to to put put pressurepressure on on banks banks to to either either move move out out the the risk risk curve curve, or, or reduce reduce their their cost cost base base which which mightmight make make them them less less able able to to mitigate/monitor mitigate/monitor the the risks risks they they are are taking.” taking.” Similar Similar messagesmessages came came from from many many different different points points around around the the world world (see (see box). box).

NotNot everyone everyone was was pessimistic. pessimistic. A A number number of of respondents respondents felt felt that that while while macro- macro- economiceconomic risk risk was was high, high, a amuch-strengthened much-strengthened banking banking system system could could withstand withstand the the shocks.shocks. A A senior senior US US banker banker said said that that “slow “slow growth growth and and volatile volatile markets markets will will impact impact individualindividual institutions, institutions, but but safety safety of of the the system system is isunlikely unlikely to to be be a aconcern.” concern.” A A US US regulatorregulator added added that that “macro “macro volatility volatility is isalways always a arisk risk to to banks. banks. Recent Recent prudential prudential reformsreforms should should help help to to temper temper these these risks.” risks.”

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Russia.Russia. “Negative “Negative trends trends in inthe the economy economy [are] [are] leading leading to toa declinea decline in businessin business activityactivity and and in thein the financial financial condition condition of ofeconomic economic entities entities”. ”.

Thailand.Thailand. “Slow “Slow recovery recovery and and poor poor sentiment sentiment are are affecting affecting almo almost stall alllevels levels of of businessbusiness and and consumer consumer [activity]. [activity]. Potentially Potentially this this will will reduce reduce growth growth [and [and affect affect the]the] profit profit margins margins of ofbanks banks and and financial financial institut institutions.ions.” ”

SouthSouth Africa. Africa. “In “ InAfrica Africa as as a whole,a whole, the the state state of ofthe the economy economy - es - especiallypecially in in countriescountries very very dependent dependent on on one one particular particular industry industry - over - over the the next next couple couple of of yearsyears will will be be precarious, precarious, and and strict strict monitoring monitoring needs needs to to[be [be applied]. applied].” ”

Brazil.Brazil. “The “The length length of ofthe the economic economic recession recession that that Brazil Brazil is currentlyis currently undergoing undergoing is ais mattera matter of ofmajor major concern concern for for banks banks in ingeneral general as asit willit will greatly greatly impact impact the the performanceperformance of ofthe the loan loan portfolio. portfolio.” ”

Azerbaijan.Azerbaijan. “The “The economy economy is stronglyis strongly dependent dependent on on oil oilprices prices since since the the main main inflowinflow into into the the budget budget is fromis from oil oilexports. exports. The The low low level level of ofoil oilprices prices is negativelyis negatively affectingaffecting the the overall overall economy economy and, and, in inturn, turn, the the business business environment environment including including banking.banking.” ”

2.2. Criminality Criminality (9) (9) TheThe risk risk to tobanks banks in inareas areas such such as as money money laundering, laundering, tax tax evasion evasion and and cyber cyber attackattack

TheThe reason reason for for the the very very sharp sharp rise rise in inthis this risk risk is isclear: clear: cybercrime. cybercrime. Respondents Respondents in in NorthNorth America America and and the the UK UK had had it asit astheir their biggest biggest concern, concern, and and other other regions regions ranked ranked it noit no lower lower than than No. No. 3. 3.

“Tax“Tax evasion evasion and and money money laundering laundering are are two two threats threats that that can can be be managed managed and and controlled.controlled. Cyber-attacks Cyber-attacks are are a differenta different animal”, animal”, said said an an industry industry observer observer in inthe the US.US. Simon Simon Samuels, Samuels, a bankinga banking consultant consultant in inthe the UK, UK, said: said: “We “We may may at atsome some point point CyberCyber-attacks-attacks are are seesee a cyber-attacka cyber-attack so sopowerful powerful on on an anindividual individual ban bank thatk that it hasit has the the power power to tobring bring ‘a‘a different different animal’ animal’ downdown the the institution, institution, necessitating necessitating a statea state bailout bailout”. ”.Respondents Respondents from from around around the the worldworld had had similarly similarly urgent urgent comments comments (see (see box). box).

ManyMany respondents respondents worried worried that that banks banks have have little little pow power erto toprevent prevent attacks attacks because because cybercrimecybercrime comes comes in inmany many different different guises, guises, from from opp opportunisticortunistic hackers hackers holding holding privateprivate data data hostage, hostage, to toorganised organised criminals criminals pilfer pilferinging funds funds through through digital digital channels, channels, to tostates states using using espionage espionage to tosteal steal banks’ banks’ intellect intellectualual property. property. Ashley Ashley Dowson, Dowson, chairmanchairman of ofSepa Sepa Consultancy Consultancy in inthe the UK, UK, saw saw “potent “potentialial for for even even greater greater threats threats as as financialfinancial institutions institutions experiment experiment with with new new technolo technologiesgies ...... crypto crypto currencies, currencies, distributeddistributed ledgers, ledgers, and and real-time real-time payments payments and and set settlement”.tlement”.

Banks’Banks’ underinvestment underinvestment in intheir their “creaking “creaking technolog technology systems”y systems” means means they they are are on on thethe back back foot foot while while criminals criminals become become more more numerous, numerous, sophisticated sophisticated and and audacious. audacious. A Arespondent respondent in inthe the US US said: said: “Cyber “Cyber criminals criminals work work 24 24 hours hours a daya day and and 7 days7 days a a week,week, and and don't don't have have to topay pay taxes taxes on on their their gains. gains. The The industry industry is veryis very vulnerable”. vulnerable”.

TheThe material material risk risk is ispotentially potentially very very large. large. “Billi “Billionsons are are lost lost annually annually in inthese these types types of ofattack”, attack”, said said a bankera banker in inNew New Zealand, Zealand, while while an anindustry industry observer observer in inthe the UK UK warnedwarned that that “cyber-attack “cyber-attack on on key key financial financial infrastr infrastructureucture could could paralyse paralyse key key activitiesactivities - such - such as asinterbank interbank payments payments - for - for some some days”. days”.

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And there are other risks: regulatory reprimand, fines and reputational damage from And thereimpaired are other security risks: regulatory and theft reprimand, of customer fines data. and reputational damage from impaired security and theft of customer data.

Even if banks do rise to the challenge, criminals will target the weakest links of a Even if banks do rise to the challenge, criminals will target the weakest links of a heavilyheavily interconnected interconnected financial systemfinancial which system is currently which seeing is cu rrentlya proliferation seeing of a proliferation of new players.new players.“While banks “While ready banks their readycyber defencetheir cybers, suppliers defence ands, othersuppliers financial and other financial market marketinfrastructure infrastructure (i.e. payment (i.e. systems) payment will systems) need to bewill prepared, need to but be are prepared, not but are not AllAll banks banks are are subject subjectto the sameto the regulatory/supervisory same regulatory/supervisory authority as authoritthe banks”,y as said the a banks”,risk said a risk managermanager in Canada. in Canada. vulnerablevulnerable through the through the weakest link in “Cyber theft will only grow and at least one bank will fail in the next 10 years as a weakest link in result” -“ ChiefCyber financial theft will officer, only grow Singapore and at least one bank will fail in the next 10 years as a the system result” - Chief financial officer, Singapore the system “A severe cyber attack could bring down a major financial institution or a financial market infrastructure/bourse,“A severe cyber attack and couldcreate bringa systemic down impact” a major financial institution or a financial - Regulator,market Canada infrastructure/bourse, and create a systemic impact”

“Money -laundering Regulator, and Canada tax evasion can harm reputation and cause regulatory penalties but are unlikely to be life threatening. Cybercrime, though, could destroy “Moneya bank” -laundering Observer, UK and tax evasion can harm reputation and cause regulatory penalties but are unlikely to be life threatening. Cybercrime, though, could “Every bankdestroy is vulnerable, a bank” -and Observer, a coordinated UK attack could be devastating. Adoption of new technologies makes this a growing risk”. - Risk manager,“Every bank USA is vulnerable, and a coordinated attack could be devastating.

“We areAdoption awaiting the of newfirst default technologies caused by makes cybercrime this a due growing to loss rofisk”. funds entrusted”- Risk - Chief manager, risk officer, USA The Netherlands

“We are awaiting the first default caused by cybercrime due to loss of funds

entrusted” - Chief risk officer, The Netherlands Only five respondents out of 672 gave this risk a score of 1 out of five. Among their reasons were that this was a passing scare “like Y2K”, that the risk lay more in regulatory penalties than actual theft, and that tougher controls would keep the risk at bay. Only five respondents out of 672 gave this risk a score of 1 out of five. Among their reasons were that this was a passing scare “like Y2K”, that the risk lay more in Respondentsregulatory paid less penalties attention than to moreactual conventional theft, and formsthat to ofugher crime. controls The head would of keep the risk finance at a bank in Luxembourg said: “Money laundering and tax evasion can be preventedat bay.by good compliance measures and scrutiny of the economic background of transactions”. But a few concerns were raised, mainly in emerging economies. A respondentRespondents in Nigeria spokepaid lessof “the attention threat of to enhan moreced conventional corruption and forms the impact of crime. on The head of money financelaundering.” at a Mohammad bank in Luxembourg Pourgholamali, said: head “Money of corporate laundering banking andat Bank tax evasion can be Pasargadprevented in Iran, said: by good“Terrorism compliance finance andmeasures the money and stream scrutiny from of terrorism the economic is a background very importantof transactions”. challenge all But over a thefew world, concerns and specifically were raised, in the m ainlyMiddle in East”. emerging economies. A respondent in Nigeria spoke of “the threat of enhanced corruption and the impact on

money laundering.” Mohammad Pourgholamali, head of corporate banking at Bank Pasargad in Iran, said: “Terrorism finance and the money stream from terrorism is a very important challenge all over the world, and specifically in the Middle East”.

14 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

3. Regulation (1) 3. RegulationThe risk that (1)the current wave of regulation will have a damaging effect on The riskbanks that the current wave of regulation will have a damaging effect on banks Concern about the potentially damaging impact of regulatory tightening continues to Concernrank about high the potentiallyamong the damaging risks that impact people of re gulatorysee to thetightening health continues of the bankingto industry. rank highHowever among there the risks has thatbeen people a noticeable see to the shift he althin opinio of then bankingaway from industry. the strong concerns Howevervoiced there inhas the been 2014 a noticeable survey shift(when in opinio regulationn away wasfrom votedthe strong top concerns risk), towards a more voicednuanced in the 2014 view survey which (when accepts regulation the needwas votedfor tougher top risk), con towardstrols, thougha more also questions nuanced view which accepts the need for tougher controls, though also questions their costtheir and cost effectiveness. and effectiveness.

This wasThis the was No. the 2 riskNo. for 2 bankersrisk for but bankers lower forbut t hoselower outside for thosethe industry outside the industry (observers(observers placed itplaced No.4). it Geographically, No.4). Geographically, it was seen toit bewas the seen highest to bein Europethe highest in Europe RegulatoryRegulatory risk risk (No. 2),(No. with 2), North with America North placingAmerica it No.placing 3 and it th No.e Far 3 East and Pacific the Far region East No.Pacific 7 region No. 7 hashas become become The regulatoryThe regulatory crackdown crackdown since the sincefinancial the crisis financial is still crisis widely is seenstill towidely be seen to be more nuanced excessive,excessive, costly and costly rife withand inconsistenciesrife with inconsistencies and unintended and consequences. unintended Manyconsequences. Many more nuanced respondents said its volume and complexity were eating into management time and respondents said its volume and complexity were eating into management time and industry margins while producing questionable benefits. A respondent from Germanyindustry saw “an margins overkill inwhile risk reporting producing without questionable any additional benef addedits. value A forrespondent from the system.”Germany One sawEuropean “an overkill banker even in risk said reporting that regulatory without cost any had additionalreached the added value for point wherethe system.” “non-compliance One European is economically banker evenjustifi saidable”, that and regulatorywas only kept cost in had reached the check bypoint reputation where risk. “non-compliance is economically justifiable”, and was only kept in

check by reputation risk. “My main concern is the regulatory Respondents singled out particular consequences, such as a loss of pendulum since 2008. This has massively derisked“My main the bankingconcern sector is the regulatory innovationRespondents and diversity singled as banksout particular consequences, such as a losswith anof avalanchependulum of liquidity, since solvency, 2008. This has conformed to the same rules, and a compliance andmassively governance derisked reporting the banking sector reductioninnovation in competition and becausediversity of as requirementsbanks with and an banking avalanche taxes (and of liquidity, solvency, the disproportionateconformed to theimpact same onrules, moreand toa come...).compliance Is the global and governance reporting smallerreduction banks and in the competition rise in entry because equilibrium of right?requirements Is the banking and sectorbanking taxes (and able to take and manage risks to barriers.the A creditdisproportionate analyst said thatimpact on more to come...). Is the global regulation was encouraging promote economic growth efficiently, or smaller banks and the rise inare entry we moving equilibrium to an inefficient right? zero Is the risk banking sector “herding” so that “banks will migrate able to take and manage risks to to portfoliosbarriers. thatA credithave identicalanalyst saidsystem? that ” Emmanuel Vercoustrepromote economic growth efficiently, or optimalregulation regulatory profiles.was If thisencouraging Deputy CEOare and we Chief moving Financial to an Officer inefficient zero risk were to“herding” happen soit thatwould “banks amplify will migrate AXA Banquesystem? Europe, ”Belgium systemicto risk.”portfolios that have identical Emmanuel Vercoustre

optimal regulatory profiles. If this Deputy CEO and Chief Financial Officer Proposalswere to “ring-fence”to happen retail it wouldoperations amplify in many markets, including the UK, were a particular concern. A UK banking professor said theAXA UK Banqueproposals Europe, “will have Belgium the systemic risk.” effect of weakening, rather than strengthening, the banking system, besides raising costs and inefficiencies.” Proposals to “ring-fence” retail operations in many markets, including the UK, were But thesea particular concerns -concern. many of Athem UK familiar banking from professor previous saidBanana the Skins UK proposalssurveys - “will have the were balancedeffect of by weakening, the large number rather of than respondents strengthening, who felt the that banking - on the system,whole - besides raising what wascosts happening and inefficiencies.” was necessary and beneficial. Banks were stronger, more risk aware - and in many cases were operating profitably despite the sharp rise in complianceBut thesecosts. concernsA US regulator - many argued of them that familiar“the economic from effectsprevious of theBanana crisis Skins surveys - have hadwere (and balanced continue byto have)the large a much number more seriousof respondents effect on bankwho performancefelt that - on the whole - than the post-crisis reforms,” and the chief risk officer of a Canadian bank said that “regulationwhat isn't was going happening away and was most necessary institutions and have beneficial. adapted to Bathenks impact were of newstronger, more risk requirements”.aware - and in many cases were operating profitably despite the sharp rise in compliance costs. A US regulator argued that “the economic effects of the crisis have had (and continue to have) a much more serious effect on bank performance than the post-crisis reforms,” and the chief risk officer of a Canadian bank said that “regulation isn't going away and most institutions have adapted to the impact of new requirements”.

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4. Technology risk (4) The risk that banks will fail to keep up with technological change

4. TechnologyAfter jumping risk14 places (4) in 2014, technology risk is still seen to be exceedingly The riskurgent that banks this year.will fail It towas keep ranked up with No.2 technological in the Far Eas changet Pacific region.

After jumping 14 places in 2014, technology risk is still seen to be exceedingly urgent thisThe year. heart It was of rankedthe problem No.2 in theis seenFar Eas tot Pacificlie in region.“hopeles sly out-dated core banking IT systems”, suffering from many years of under-investment and now ill-equipped to The heartcope of thewith problem the strains is seen placed to lie onin “hopelesthem bysly the out-dated digital coreand bankingmobile bankingIT revolution. systems”,Alexander suffering fromCampbell, many years editor of under-investof Operationalment andRisk now & ill-equippedRegulation to magazine, said a cope withfailure the strains to keep placed pace on with them technology by the digital is and“not mobile so muc bankingh a risk revolution. as a certainty; the burden Alexanderof Campbell,multiple legacyeditor ofsystems Operational at some Risk banks & Re gulation(due to magazine,a history saidof mergers) a is already failure tocausing keep pace real with problems”. technology The is “not consequence so much a risk is thatas a certainty;banks are the vulnerable burden to cybercrime of multipleand legacy service systems disruptions, at some andbanks risk (due alienating to a history custom of mergers)ers who is alreadyhave already embraced causing real problems”. The consequence is that banks are vulnerable to cybercrime and servicetechnology disruptions, in otherand risk areas alienating of their custom lives.ers who have already embraced technology in other areas of their lives. “Banks create vested interests As one UK banker put it, “Substantial “Banks createinternally vested in interestsall sorts of areas.As IT oneis UK bankerspending put [being]it, “Substantial needed at a time when internallyan in allexample sorts of withareas. staff IT is seeing spendingtheir [being]income needed is at lowa time and when costs [are] being an example with staff seeing their jobs being dependent on keepingincome a is lowdriven and costshard [are]is not being a good recipe for jobs beingsystem dependent in place. on keeping Kills innovation.” a driven hard is not a good recipe for system in place. Kills innovation.” investment”. But even if banks have no Andrew Henderson investment”. But even if banks have no Andrew Henderson Managing director choice, the questionchoice, of thehow question and where of to how and where to Managing director invest is a difficult one: there is a fear WychwoodWychwood Consulting, Consulting, UK UK invest is a difficult one: there is a fear that new andthat costly new systems and costlycould besystems could be quickly renderedquickly obsolete. rendered “The cost obsolete. and “The cost and BankingBanking complexitycomplexity of IT updates of IT is updatesdifficult tois justify”,difficult said to ajustify”, treasurer said in New a treasurer Zealand. in New Zealand. systems are CompoundingCompounding this is that thisbanks is “maythat banksincur new “may risks incur as they new try risks to keep as theypace”, try said to keep pace”, said systems are a financiala financial analyst in analystthe US – in such the as US systems – such out asages systems from bungled outages upgrades. from bungled upgrades. badly out of badly out of A widely echoed point was that if banks do not respond to changing technology, date “disruptiveA widelyinnovators echoed such pointas Google was thatand Appleif banks may do steal not marketrespond share to changingvery technology, date quickly by“disruptive disintermediating innovators banks suchfrom theiras Google clients”, andaccording Apple to amay risk managersteal market share very in Canada.quickly The bydirector disintermediating of finance at banks a bank from in theirIndia cliensaid:ts”, “Technological according to a risk manager innovationsin Canada.will eat away The chunks director of business of finance from b anks,at a such bank as thein largeIndia number said: “Technological of paymentinnovations apps and the will expansion eat away of chunksfinancial of serv businessices support from through banks, technology such as the large number companies”.of payment apps and the expansion of financial services support through technology companies”. But some respondents warned that “Large banks continue to rely on old banks should not try and overreach in systems that simply cannot provide the this area.But some“Those respondentswho follow warned customer that experience“Large and banks expectations continue to rely on old technologybanks change should for notits owntry andsake overreach of today”. in systems that simply cannot provide the Mohamed Datoocustomer experience and expectations will go thisdown. Thosearea. who“Those wait untilwho Governance,follow risk & compliance someonetechnology else has taken change the risks for and its own sake of today”. consultant Mohamed Datoo used trustworthy technology to Honda Financial Services, Canada will go down. Those who wait until Governance, risk & compliance underpinsomeone market innovations else has takenwill do the risks and much better”, said Philip Virgo, director of Winsafe in theconsultant UK. Another UK-based risk managerused said:trustworthy “Banks don't technology need to be atto the fHondaorefront Financial [of technological Services, Canada change],underpin merely in themarket pack behind.innovations Staying will close do enough will be the hardest task”. much better”, said Philip Virgo, director of Winsafe in the UK. Another UK-based risk manager said: “Banks don't need to be at the forefront [of technological change], merely in the pack behind. Staying close enough will be the hardest task”.

16 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org Banking Banana Skins 2015 Template draft 1 C S F I / New York CSFI

5. political interference (2) 5. PoliticalThe risk interference of political interference (2) in management and lending policies, or the The risk impositionof political interference of new mandates, in management taxes and and lending costs policies, or the imposition of new mandates, taxes and costs The risk of political interference ranks high in the minds of bankers, still sore from The risk ofthe political “bashing interference” they received ranks high in in thethe pastminds seven of bankers, years. still But sore concern from about this risk is the “bashing”easing. they It received was down in the three past sevenplaces years and. Butits absoluteconcern about score this dropped risk is a few basis points, easing. It suggestingwas down three in theplaces words and itsof absoluteformer sbankingcore dropped supervisor a few basis Richard points, Farrant, “Banks are suggesting in the words of former banking supervisor Richard Farrant, “Banks are still an easystill political an easy target, political but this target, is diminis buthing this withis diminishing time.” with time.”

The questionThe is question whether thisis whether perennial thisrisk perennialis really abating risk isor reallymerely abatingon hold whileor merely on hold while public opinionpublic makes opinion its mind makes up about its mind banking up beha aboutviour. banking The sceptics behaviour. felt that The sceptics felt that nothing muchnothing had reallymuch changed. had really A chief changed. operating A chiefofficer operating at one of the officer large UKat one of the large UK banks saidbanks there saidwas “a there tendency was for“a tendencysociety, regul forators society, and politicians regulators to view and politicians to view Is political risk banking as a community service where 'profit' is unacceptable.” In Switzerland, Is political risk Daniel Martineau,banking executive as a community chairman of serviceSummit Trus wheret International, 'profit' is said: unacceptable. “This has ” In Switzerland, really on the been true Dain Switzerlandniel Martineau, and is executivelikely to continue chairman I'm sorry of Summit to say, to Trust the detriment International, of said: “This has wane?really on the the jurisdiction”.been true in Switzerland and is likely to continue I'm sorry to say, to the detriment of the jurisdiction”.

wane? Even if the financial crisis is now a matter of the past, respondents saw plenty of reasons whyEven governments if the financial might step crisis in again: is now the nea ed matter to raise of revenues the past, at a respondentstime of saw plenty of budget stress, to direct lending to “socially useful” sectors or, conversely, to constrain reasonslending to why bubble governments sectors such mightas housing step and in toagain: encourage the need new entrantsto raise to revenues at a time of take on thebudget established stress, banks. to The direct head lending of operatio to nal“socially risk at a Luxembourg useful” sectors bank or, conversely, to saw a politicalconstrain agenda lending which toincluded bubble investor sectors prot suchection, as housing rebuilding and the to national encourage new entrants to tax base andtake combating on the establishedprofit shifting. banks. The head of operational risk at a Luxembourg bank saw a political agenda which included investor protection, rebuilding the national The politicaltax baseoutlook and is combatingalso very uncertain, profit shifting. with major elections in the offing in many places, including the US, and highly unsettled conditions in the eurozone and the Middle East. The Greek response here was apprehensive for obvious reasons. The political outlook is also very uncertain, with major elections due in many However places,there is includinglittle consistency the US, to this and risk, highly its level unsettled depending conditions very much in on the eurozone and the individualMiddle countries. East. Among The our Greek respondents, response concern here was was highest apprehensive in Europe forand obvious reasons. A North America,banker and said: among "In tax Greece havens which the mainalways concern feel vulnerable is country to political risk and whether the mood swingsgovernment over the horizon.will stick A respondentto its commitments from the Cayman towards Islands creditors said: “The and implement the [EU fear is that the US and later other jurisdictions limit who they allow their banks to do business with,bail- andout] I memorandumcan see it including.” banks in perceived tax havens”.

The UK viewHowever was broadly there positive. is little Although consistency British to banks this risk,have itshad levela rough depending ride very much on since the individualcrisis, there is countries. a clear perception Among that our the respondents, government wants concern to call was a halt highest in Europe and and allowNorth them to America, recover confidence and among and trust. tax havensA bank whichdirector alwayssaid this feelwas “an vulnerable to political ever presentmood risk swingsbut [is] unlikelyover the to horizon.reach a leve A lrespondent that threatens from financial the stability.Cayman Islands said: “The Politicians generally pull back from the brink when they get close to this.” fear is that the US and later other jurisdictions limit who they allow their banks to do business with, and I can see it including banks in perceived tax havens”.

The UK view was broadly positive. Although British banks have had a rough ride since the crisis, there is a clear perception that the government wants to call a halt and allow them to recover confidence and trust. A bank director said this was “an ever present risk but [is] unlikely to reach a level that threatens financial stability. Politicians generally pull back from the brink when they get close to this.”

17 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 17 C S F I / New York CSFI

6. Quality of risk management (11) 6. QualityThe riskof riskthat banks management will incur losses (11) because of inadequate risk The risk thatmanagement banks will incur losses because of inadequate risk management Concern about the strength of banks' risk management is high1. Every type of 1 Concern aboutrespondent the strength we surveyed of banks' – includingrisk managemen risk managerst is high .– Every had it typein their of top ten. respondent we surveyed – including risk managers – had it in their top ten.

Few disputedFew that disputed the industry that thehas devotedindustry a hasgreat devoted amount ofa greattime andamount money of to time and money to improving improvingthe management the management of risk in recent of years;risk in the recent question years; is how the effective question it is how effective it has been. hasBanks been. are “throwingBanks are resources “throwing at the resources problem asat opposedthe prob tolem necessarily as opposed to necessarily getting it right”,getting said it right”,Stephen said Walker, Stephen fund manageWalker,r atfund Sanlam manage FOURr atin Sanlamthe UK. FOUR in the UK. RiskRisk The LIBORThe andLIBOR forex manipulationand forex manipulationscandals are glariscandalsng examples are glari of ngrisk examples of risk management is managementmanagement failure. failure. management is One question is the strength of bankers' commitment to risk management, being weakened One question is the strength of bankers' commitment to risk management, being weakenedparticularly at a time of market recovery. Some respondents wondered whether, by competition seven yearsparticularly after the height at aof time the crisis, of market complac recovery.ency was beginningSome res topondents creep into wondered whether, by competition banks’ thinking.seven “Riskyears had after its momentthe height in the of sunthe bu crisis,t this iscomplac being competedency was away beginning as to creep into the marketbanks’ returns thinking.to aggressive “Risk growth”, had its said moment the chief in creditthe sun officer but thisof a is bank being in competed away as Australia. theA banker market in Mexicoreturns warnedto aggressive that risk growth”,functions aresaid being the relegatedchief credit to the officer of a bank in back seat asAustralia. banks are Apushed banker to increase in Mexico loan warnedactivity. that risk functions are being relegated to the back seat as banks are pushed to increase loan activity. Some of the fault is seen to lie with “Pressure on results [is] weakening onerous and distracting regulatory the position of risk managers.” requirements. “ThereSome isof a thereal faultdanger is seen to lie with Chief risk “Pressureofficer on results [is] weakening that the risk functiononerous is increasinglyand distracting regulatory Slovakia the position of risk managers.” having its focusrequirements. turned to regulatory “There is a real danger Chief risk officer box-ticking, ratherthat than the proactiverisk function risk is increasingly Slovakia management”, said the chief risk officer of a bank in Australia. A respondent in the having its focus turned to regulatory UK said: “Risk management is all done now by slavish regulatorybox-ticking, rule-following rather or, than proactive risk if the bankmanagement”, fails to comply, said by theinternal chief ratings-based risk officer models of a bank that infiddle Australia. the risk- A respondent in the weighted assets … Surely a disaster itching to happen”. UK said: “Risk management is all done now by slavish regulatory rule-following or, Several respondentsif the bank also fails worried to comply, that banks by have internal become ratings-based too dependent models on very that fiddle the risk- technical riskweighted management assets models … Surely understood a disaster by only itching a few to people. happen”. The director of a consulting firm in the UK criticised “over reliance on quantitative risk models and not enoughSeveral qualitative respondents analysis”, alsowhile worried the head that of banksinternal have audit beatcome a bank too in dependent on very Belgium said:technical “Complex risk models management can contain models errors understood that are difficult by only to detect”. a few people. The director of a consulting firm in the UK criticised “over reliance on quantitative risk models and However there were also cautionary voices about the opposing risk of stifling growth. A notUK bankenough board qualitative director said analysis”, that “[banks] while may the become head too of safe. internal Risk isaudit at a bank in inherent toBelgium business said: and “Complexeconomic development. models can containWe should errors not that run arerisk difficult in a to detect”. cavalier manner, nor should we incentivise bankers or asset managers to do so. We should, however,However be carefulthere ofwere curbing also risk cautionary taking; in doingvoices so weabout create the the opposing risk of risk of stifling reducing ourgrowth. growth A rate UK to levelsbank thatboard will director not employ said our that workforce”. “[banks] may become too safe. Risk is inherent to business and economic development. We should not run risk in a cavalier manner, nor should we incentivise bankers or asset managers to do so. We should, however, be careful of curbing risk taking; in doing so we create the risk of reducing our growth rate to levels that will not employ our workforce”.

1 The absolute score given to this risk was slightly lower than in 2014 (by 0.06 out of 5) but the ranking position rose because of changes in the score of other risks.

1 The absolute score given to this risk was slightly lower than in 2014 (by 0.06 out of 5) but the ranking position rose because of changes in the score of other risks.

18 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

7. Credit risk (7) The risk that banks will suffer losses from lending to sovereign borrowers, 7. Creditbusinesses risk (7) and consumers The risk that banks will suffer losses from lending to sovereign borrowers, businesses and consumers Concern about credit risk remains high. All the major areas of credit look Concern aboutvulnerable, credit riskbe theyremains sovereign high. All borrowers, the major corporatesareas of credit or consumers,look or different vulnerable,economic be they sovereign regions. borrowers,Indebtedness corporates is still orrising, consumers, bank leverageor different is worrying, and the economic regions.system Indebtednessstill has to isundergo still rising, the bantestk ofleverage interest is worrying,rate “normalisation” and the when central system stillbanks has to begin undergo to reversethe test ofquantitative interest rate easing. “normalisation” True, QE when reversal central may be postponed if banks beginthe to globalreverse economyquantitative begins easing. to True, weaken, QE reversal but this may would be postponed still be ifbad news because it the global wouldeconomy make begins creditworthiness to weaken, but thiseven would more still fragile. be bad news because it would make creditworthiness even more fragile.

Kathleen Tyson,Kathleen CEO Tyson, of Granularity CEO of Ltd, Granularity a UK financial Ltd, consultancy, a UK financial said that consultancy, “the said that “the normalisationnormalisation of interest ratesof interest[...] will ratescause [...] substantial will cause stress suonbstantial governments, stress on governments, debtors anddebtors financial and institution financial creditors. institution Levera creditors.ge levels areLevera nowge well levels in excess are nowof well in excess of BankBank leverage leverage the pre-2008the crisis pre-2008 levels crisisthanks levelsto the incentivesthanks to towardthe incentives debt finance toward created debt by finance created by remainsremains high, high, central bankcentral practices bank of practicesfinancial repression of financial (ult rarepression low policy (ult interestra low rates) policy and interest rates) and quantitativequantitative easing (expanding easing government (expanding and government financial sector and borrowing financial capability sector borrowing capability but ‘so far so through expansionary credit practices). At the same time the productive capacity of but ‘so far so through expansionary credit practices). At the same time the productive capacity of good’ the private sector, which must service debts of both private sector and governments, good’ has grown theonly private slowly sector,and may which still be must fragile.” service The debtschief creditof bot officerh private at a sectorlarge and governments, Australian hasbank grown said: “Debt-fuelled only slowly asset and bubbles may still will benot fragile.”end comfortably”. The chief credit officer at a large Australian bank said: “Debt-fuelled asset bubbles will not end comfortably”. “The biggest underlying vulnerability is the very high and increasing level of indebtedness“The of borrowers biggest underlying around the worldvulnerability - in some is countries the very largely high and increasing level of corporates (e.g. China), in some countries households (UK, US) and in other countries governmentsindebtedness (Europe, of borrowers Japan). It around seems imp theossible world in- inany some country countries to largely achieve growthcorporates without increasing(e.g. China), indebtedness. in some countries And crisis managementhouseholds (UK, US) and in other invariably justcountries involves governments shifting debt from (Europe, the private Japan). to public It seems sectors. imp ossible in any country to achieve growth without increasing indebtedness. And crisis management “But higherinvariably indebtedness just brings involves greater shifting financial debt fragility. from Regulatorsthe private and to publicbanks sectors. have made some progress in reducing leverage in the banking sector. But it remains high“But nonetheless. higher indebtedness And the increasing brings indebtedness greater financial of borrowers fragility. leaves Regulators and banks banks vulnerable in the face of economic shocks.” Banking supervisorhave 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.” So why doesn'tBanking credit risk supervisor rank higher up the scale?

One reason is “so far so good”. The warning signs are all there, but the actual incidence ofSo loan why loss doesn't is so creditfar relatively risk rank low, higher and could up thediminish scale ?further if global growth continues and banks become stronger. One respondent said: “We live in uncertain timesOne reasonbut I identify is “so no far special so good”. vulnerabi Thelities”. warning Another signs reason are isall that there, but the actual credit riskincidence management of loanis supposedloss is so to far have relatively improved low, as and a couldcore banking diminish further if global competence. The head of group regulatory affairs at a major French bank said: “This is a normalgrowth risk which continues can be mitigated and banks by sound become risk management stronger. Onepractices”. respondent said: “We live in uncertain times but I identify no special vulnerabilities”. Another reason is that The main worrierscredit riskon this management front were risk ismanagers supposed who placedto have credit improved risk at No. as5 a core banking in their rankings.competence. Bankers Theplaced head it at of No. group 6 and regulatory other classes affairs of respondent at a major placed French it bank said: “This in the low isteens. a normal Geographically, risk which it wascan ofbe greatest mitigated concern by sound in the riemergingsk management market practices”. world. The manager of the risk management department of a large Chinese bank said: “In emergingThe main market worriers economies, on this especiallyfront were in riskChina, managers debt levels who are placed rising credit risk at No. 5 rapidly and so is the default rate. Globally, risk tolerance is likely to be lower as a result of a newin their wave rankings. of recession.” Bankers placed it at No. 6 and other classes of respondent placed it in the low teens. Geographically, it was of greatest concern in the emerging market world. The manager of the risk management department of a large Chinese bank said: “In emerging market economies, especially in China, debt levels are rising rapidly and so is the default rate. Globally, risk tolerance is likely to be lower as a result of a new wave of recession.”

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 19 C S F I / New York CSFI

8. Conduct practices (16) The risk that banks will be damaged by poor sales, customer servicing and other conduct of business practices 8. Conduct practices (16) The risk that banks will be damaged by poor sales, customer servicing and other conductThe riskof business that banks practices will be damaged by unethical business practices rises to its highest ever position in this survey. The fact that bankers ranked it No. 16, much The risk lowerthat banks than will risk be managers damaged by(No. unethical 6) and bu othersiness respondepractices risesnts (No. to its 5), suggests some highest evercomplacency position in withinthis survey. the industry.The fact that bankers ranked it No. 16, much lower than risk managers (No. 6) and other respondents (No. 5), suggests some complacencyA repeated within the theme industry. was the absence of “culture change” in banks despite tougher controls and vast fines. A risk manager at a bank in the UK (where this Banana Skin A repeatedwas theme ranked was theNo. absence 5) described of “culture unethical change” businessin banks despitepractices tougher as a “perennial risk controls and[which] vast fines. won’t A riskgo manageraway as at wea bank make in the money UK (where out ofthis people Banana whoSkin don't pay money was ranked No. 5) described unethical business practices as a “perennial risk [which] won’tback”. go away as we make money out of people who don't pay money back”. “There is little evidence of the required culture change in banking. We hear talk “There is littleof culture evidence change of the requiredprogrammes, culture butchange the inpressures banking. Weon hearstaff talkto sell, or only meet of culture customerschange programmes, who are butlikely the to pressures buy, remain. on staff This to sell, drive or sonly conduct meet of business risk. customersFurther, who are thelikely LIBOR to buy, andremain. FOREX This drive scandals,s conduct which of business are ve ryrisk. recent and post-date Further, thethe LIBOR banking and crisis,FOREX point scandals, to poor which risk are management very recent and controls post-date in areas of banks the bankingwhere crisis, losses point to can poor be risk considerable. management controlsThis presents in areas sys of bankstemic risk.” where losses can be considerable. This presents systemic risk.” Caroline BarrCaroline Barr Financial ServicesFinancial Consumer Services Panel Consumer Panel UK UK LittleLittle evidence evidence of true ‘culture Some respondentsSome respondents were concerned were that concerned institutions that are institutions striving to improveare striving their to improve their of true ‘culture conduct butconduct remain but tarnished remain by tarnished the industry’s by thepast industry’s transgressions. past “With transgressions. greater “With greater change’ awarenessawareness of this problem, of this banks problem, will probably banks willbeha veprobably better than beha inve the better past but than in the past but change’ continue to get a worse press”, said one academic. Others argued that banks are held continue to get a worse press”, said one academic. Others argued that banks are held to higher standards than other industries, and less readily forgiven. to higher standards than other industries, and less readily forgiven. The rapidly changing industry climate poses fresh dangers in this area. A commercialThe banker rapidly in the changing UK said thereindustry was “still climate a very poseshigh risk fresh covering dangers AML in this area. A [anti-moneycommercial laundering], banker sanctions, in the productUK said develop there mentwas “stilland salesa very and high their risk covering AML interaction[anti-money with global conductlaundering], regulators, sanctions, litigation productand claims develop managementment firmand sales and their activity”. interactionTechnological with change global with conduct its requiremen regulators,ts for litigatnew businession and practicesclaims management firm adds to this risk. activity”. Technological change with its requirements for new business practices

adds to this risk.

9. Pricing of risk (6) The risk that banks will misprice risk due to competitive and other pressures 9. Pricing of risk (6) The mis-pricingThe risk of riskthat was banks one of will the misprice major causes risk of due the global to competitive financial crisis. and It other pressures has fallen three places in the ranking, but this fall may only be temporary.

Mis-pricingThe is mis-pricingdriven by several of risk forces: was competitio one of then, abundancemajor causes of liquidity, of the lackglobal of financial crisis. It innovationhas (i.e. fallen banks three all chasing places thein thesame ranking, busines buts) and this low fa llinterest may only rates. be These temporary. were all identified by respondents as part of the mix that made mis-pricing a constant risk.Mis-pricing is driven by several forces: competition, abundance of liquidity, lack of innovation (i.e. banks all chasing the same business) and low interest rates. These Those whowere took all a positive identified view bystressed respondents the improve asments part thatof thehad takenmix thatplace madein mis-pricing a bank management.constant Therisk. senior vice president, finance, at a large Canadian bank said that “while always a concern, there is sufficient transparency in the market that

Those who took a positive view stressed the improvements that had taken place in bank management. The senior vice president, finance, at a large Canadian bank said that “while always a concern, there is sufficient transparency in the market that

20 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

materially mutes this risk”, and the head of internal audit at a Turkish bank said that “risk management structures are becoming more robust, making organisations more conservative about taking excessive/uncontrolled risks.” materially mutes this risk”, and the head of internal audit at a Turkish bank said that “ “risk management structures are becoming more robusBut t,there making were organisations many sceptics. more John Hitchins, conservative“ Theabout glut taking of global excessive/uncontrolled liquidity is risks.” already leading to silly pricing, chairman of the audit committee of Aldermore, “ led by the capital markets.” “The glut of global liquidity is But there wereone many of the sceptics. UK's newJohn challengerHitchins, banks, said that already leadingChief to risk silly officer pricing, chairman of the“history audit committee tells us ofthis Aldermore, will grow as a risk as led by theAustralia capital markets. ” one of the UK'smemories new challenger of banks,2008/9 said thatfade”. The chief Chief risk officer “history tells investmentus this will growofficer as a riskat asa Swiss wealth Australia memories of 2008/9 fade”. The chief management firm said that “in Switzerland there are additional risks from excessive lending practices by banksinvestment trying to gainofficer market at sha areSwiss in an increasinglywealth competitive management firm said that “in Switzerland there are additional risks from excessive lending practicesmortgage by market”.banks trying to gain market share in an increasingly competitive mortgage market”.

10. Business model (-) 10. BusinessThe risk that model banks (-)will fail to produce business models which meet new The risk business,that banks willsocial fail toand produce regulatory business requirements models which meet new business, social and regulatory requirements

With the Withprofound the changesprofound that changes the banking that industry the banking has gone industry through has over gone recent through over recent years, weyears, introduced we introduced a Banana Skin a Banana to this year’s Skin stourvey this to year’s assess stheurvey risk tothat assess banks the risk that banks might failmight to produce fail to business produce models business which models meet the which new realities. meet the The new fact realities. that it The fact that it Can banks comes in comesthe top inten the overall top –ten and overall ranked – consistently and ranked high consistently across every high region across we every region we Can banks surveyed surveyed– shows it –is showsreceiving it isa lotreceiving of thought. a lot of thought. evolve,evolve, or justor just The thrustThe of thrustmany commentsof many wascomments that big was that big retreat? banks are slow to innovate even at the best of “Banks' entire business retreat? banks are slow to innovate even at themodels best are of being“Banks' reshaped entire business times and, in the face of regulatory and political models are being reshaped pressure, timeshave retrenchedand, in the into face their of regulatorytraditional andnot political by the economy's needs but by the unintendednot by the economy's needs businessespressure, and withdrawn have retrenched from non-coreinto their traditional consequences ofbut the by the unintended markets. Conservative attitudes increasingly businesses and withdrawn from regulators'non-core meddling. consequences Banks of the prevail. One risk manager in the UK says this markets. Conservative attitudes increasinglywill comply – we regulators'[customers] meddling. Banks “feels like a big risk as most banks are led by prevail. One risk manager in the UKwill says suffer.” this will comply – we [customers] traditional bankers. Having an entrepreneurial Observer, UK “feels like a big risk as most banks are led by will suffer.” flair is necessary to keep ahead of the pack”. Observer, UK Another respondenttraditional likened bankers. big banksHaving to “lumberingan entrepreneurial beasts showing little capability for rapid flairevolution is necessary to social and to economic keep ahead needs”. of the pack”. Another respondent likened big banks to “lumbering beasts showing little capability Enumeratingfor rapidthe concerns, evolution a risk to managersocial and at a economic bank in Belgium needs”. warned of “the non- sustainability of the current business model due to new or aggressive competitors (more attractiveEnumerating credit rates, the concerns,high interest a riskrate manageron saving ataccounts, a bank etc.),in Belgium advancing warned of “the non- disintermediation,sustainability market of entrantsthe current with businessdisruptive model innovations due to (e.g.new paymentsor aggressive competitors market), and(more ‘unfair’ attractive competition credit of rates, state-owned high interestbanks.” rate on saving accounts, etc.), advancing

This leavesdisintermediation, the industry vulnerable market to new entrants players “whichwith aredisruptive not burdened innovations with the (e.g. payments IT issues market),or processing and loops‘unfair’ and competition hurdles faced of by state-owned larger institutions”, banks.” such as tech companies offering peer-to-peer lending, mobile money and cyber currencies. DifferencesThis in leavesregulation the areindustry also an vulnerable issue because to newthey playerscreate an “which unlevel areplaying not burdened with the field betweenIT issues different or processing types of competitorloops and forhurdles the samefaced business. by larger The institutions”, chief such as tech innovationcompanies officer of aoffering bank in Singaporepeer-to-peer commented lending, on mobile“technology mon companiesey and cyber currencies. taking awayDifferences profitable in slices regulation of the arebanking also anbusine issuess andbecause enjoying they regulatory create an unlevel playing arbitrage”. field between different types of competitor for the same business. The chief innovation officer of a bank in Singapore commented on “technology companies taking away profitable slices of the banking business and enjoying regulatory arbitrage”.

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 21 C S F I / New York CSFI Banking Banana Skins 2015 Template draft 1

A few comments, however, played down the severity of this risk. “The bank A few comments,business modelhowever, has played changed, down but the disruptionseverity of hasthis notrisk. really “The occurred.bank There are big business barriersmodel has to changed, entry” ,but said disruption the chief has not executive really occurred. of a bankThere inare Newbig Zealand. A risk barriers managerto entry”, insaid Indonesia the chief said: executive “Though of a slowbank onin innovation,New Zealand. banks A risk tend to follow trends manager andin Indonesia adapt reasonably said: “Though well slow”. on innovation, banks tend to follow trends and adapt reasonably well”.

11. Social11. Social media (19)media (19) The riskThe that arisk bank’s that brand a bank’s could brand be harmed could by be social harmed media by social media

FollowingFollowing its low position its low in positionthe 2014 survey, in the the 2014 risk survey, that social the media risk thatcould social media could damage banksdamage has banksrisen very has strongly risen very this year,strongly notably this in year, North notably America inwhere North it America where it ranked No. 6. (It came No. 8 in the Far East Pacific and No. 15 in Europe). ranked No. 6. (It came No. 8 in the Far East Pacific and No. 15 in Europe). Social media For many respondents, social media are forcing banks to make fundamental changes areSocial forcing media to the wayFor they many protect respondents, their brands social because media their are“light forcing speed banksand unprecedented to make fundamental changes are forcing reach”, theirto the unpredictability way they protect and lack their of accounta brandsbility because make them their a“ verylight different speed and unprecedented change beast to otherreach reputational”, their unpredictability risks. Criticisms andlaunc lackhed through of accountability social media canmake cause them a very different reputationalbeast damage to other whether reputational or not they risks. are Criticismswell-founded. launched “Once itthrough gets hold social it media can cause change becomes true (no matter how false) and hard to extinguish”, warned a treasurer at a bank in reputationalNew Zealand. damage “Social whether media oris absurdly not they bias areed well- againstfounded. financial “Once it gets hold it institutions”,becomes said Adriantrue (no Rossignolo, matter how actuarial false) manager and hard at toProvincia extinguish Seguros”, warned de a treasurer at a Vida in Argentina.bank in What New makes Zealand. matters worse,“Social a resp mediaondent isin the absurdly UK noted, biased is that against financial “at timesinstitutions it is difficult”, said for Adrianbanks to Rossignolo,respond to c actuarialriticism due manager to privacy at Provinciaor Seguros de competitiveVida concerns”. in Argentina. What makes matters worse, a respondent in the UK noted, is that “at times it is difficult for banks to respond to criticism due to privacy or This risk is probably too novel to be fully evaluated, let alone subjected to well- planned competitivemitigation strategies, concerns so” . there may be an element of emotion in the responses. Nonetheless, a number of respondents welcomedThis this riskinnovation, is probably seeing toothe novelbenefits to to be fully“Harm evaluated, is just one tweet let alone subjected to well- society outweighingplanned mitigation the risks: “Overall strategies, a positive so there away. may” be an element of emotion in the pro-competitive feature”, as one respondent put it, Banking consultant responses. Nonetheless, a number of respondents and an welcomedopportunity thisfor innovation,savvy banks. seeing David the benefits to “Harm is just one tweet Shirreff, a financial writer, said: “Social media should keep institutions on their toes society outweighing the risks: “Overall a positive away.” and act as an early warning system rather than a threat”. By engaging directlyBanking with consultant customerspro on-competitive social platforms, feature banks” ,can as showone respondentthey are listening put it,to and acting upon complaints.and “This an is opportunityprecisely why banks for need savvy to un bderstandanks. Davidand be active on social media ratherShirreff, than fearful,” a financial said awriter, former said:banking “Social executive media in the should UK. keep institutions on their toes and act as an early warning system rather than a threat”. By engaging directly with A few respondentscustomers ondownplayed social platforms, the longer banks term canconseq showuences they of aresocial listening media to and acting upon damage. An operations manager at a bank in New Zealand said: “Banks play everythingcomplaints. extremely safely.“This isMost precisely of the stuffwhy socibanksal media need catchesto understand is low leveland be active on social 'noise' thatmedia no one rather really than remembers fearful, (from” said a bankin a formerg point banking of view)”. executive in the UK.

A few respondents downplayed the longer term consequences of social media 12. Reputationdamage. An operations(-) manager at a bank in New Zealand said: “Banks play The riskeverything that the industry extremely will safely.suffer a Mostpoor ofreputation the stuff or sociallack of media public catches is low level trust 'noise' that no one really remembers (from a banking point of view)”.

Banks have received such a battering in recent years that one might expect reputation risk to be among the very highest threats they face. Yet the results shown by this survey12. areReputation more nuanced, reflecting (-) such questions as: is there any downside risk left, has the tide of opprobrium turned, is it time for society, in its own interest, to help banksThe riskup rather that than the knock industry them down?will suffer In the UK,a poor comments reputation included: or lack of public trust

Banks have received such a battering in recent years that one might expect reputation risk to be among the very highest threats they face. Yet the results shown by this survey are more nuanced, reflecting such questions as: is there any downside risk left, has the tide of disfavour turned, is it time for society, in its own interest, to help banks up rather than knock them down? In the UK, comments included: 23 22 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

“Damage is already done. Little risk going forward… the story is getting stale”. A risk manager at a bank in Singapore noted that: “Libor, FX fixing etc. have brought “Damageabout is already a bad done. reputation, Little risk goingbut thatforward… has notthe storyprevented is getting banks stale”. from A achieving their risk managercommercial at a bank goals”.in Singapore noted that: “Libor, FX fixing etc. have brought about a bad reputation, but that has not prevented banks from achieving their commercialInterestingly, goals”. the risk managers (including regulators) who responded to this survey

Interestingly,ranked the riskreputation managers risk (including down at regulat No. 17.ors) Bankerswho responded placed to itthis at surveyNo. 10 and observers at ranked reputationNo. 8. Geographically, risk down at No. this17. Bankers risk ranked placed highest it at No. in 10 Europe and observers (No. 6) at and North America No. 8. Geographically,(No.7). It was this much risk ranked lower highestin other in partsEurope of (No. the 6)wor andld. North America (No.7). It was much lower in other parts of the world. “The industry seems Most respondents did, of course, see “The industryremarkably seems resilient to beingMost respondentsrebuilding did, publicof course, trust assee a priority, a task remarkablyhated resilient by tothe being public” rebuilding publicwhich trust they as a predictedpriority, a taskwould be long and hated by theUK public” bank director which they predicted would be long and UK bank director difficult. “It may take two generations to get difficult. “It may take two generations to get rid of the taint”,rid said of thea respondent taint”, said in the a respondentUS. in the US. One problemOne isproblem continued is exposurecontinued to pastexposure practices to . past“Many practices banks and. “Many financial banks and financial institutionsinstitutions have improved have currentimproved processes, current but processes, what seems but to whatsting isseems the to sting is the consequencesconsequences of conduct ofbefore conduct the recent before wave the of recent regulatory wave change”, of regulatory said Don change”, said Don BankBank Campbell,Campbell, Head of Risk Head and ofCompliance Risk and atCompliance Aussie Hom eat Loans Aussie in Australia.Home Loans Others in Australia. Others reputations:reputations: took a dimmertook aview. dimmer “Banks view. will “Bankscontinue willto find continue ways of to making find wathemselvesys of making look themselves look foolish; maverickfoolish; teamsmaverick and Spanishteams andpractices Spanish will continuepractices to will come continue into the open,to come into the open, little more to and the press will continue to take full advantage of good copy,” said the senior little more to and the press will continue to take full advantage of good copy,” said the senior lose? director of a global ratings agency. The increased threat of cyber-attacks was seen to lose? compounddirector this risk. of a global ratings agency. The increased threat of cyber-attacks was seen to compound this risk. A poor reputation damages banks by weakening its lobbying efforts. For example, it has becomeA poorhard reputationfor banks to damages be seen banksto be resistinby weakeningg regulation its evenlobbying with efforts.good For example, it reason. Somehas becomerespondents hard warned for banks there tocould be alsoseen be to undesirable be resistin outcomesg regulation for even with good wider society.reason. “The Some public respondents shaming of thewarned banking there industry, could while also slowing be undesirable down, outcomes for has done great reputational damage and could be a catalyst for growth in shadow banks”, saidwider a risk society. manager “The in Canada. public shaming of the banking industry, while slowing down, has done great reputational damage and could be a catalyst for growth in shadow banks”, said a risk manager in Canada. 13. Capital availability (10) The risk that banks will not be able to raise affordable capital 13. Capital availability (10) Concern aboutThe riskthe banks' that banksability to will raise not fresh be capableital to to raiserebuild affor theirdable balance capital sheets is abating. In 2012, in the aftermath of the financial crisis, this Banana Skin stood at No. 4. The consensus is that there is plenty of capital about, and if there are shortagesConcern they apply about to particular the banks' geographic ability toareas raise or classesfresh cap of italbanks to (e.g.rebuild small their balance sheets banks) ratheris abating. than to In the 2012, industry in the as aftermatha whole. Theof the chief financ risk ialofficer crisis, of thisa large Banana Skin stood at AustralianNo. bank 4. said:The “Theconsensus world isis awash that withthere capi is talplenty at the ofmoment, capital and about, well and if there are credentialedshortages banks are they seeing apply no issues to particular in raising geographiccapital.” areas or classes of banks (e.g. small banks) rather than to the industry as a whole. The chief risk officer of a large However,Australian there are still bank potential said: problems, “The world the ma isin awashone being with cost. capi Thetal days at whenthe moment, and well banks madecredentialed super profits banks and paidare seeing out generous no issues divi dendsin raising are past. capital.” Today's banks are becoming utilities offering lower - if steadier - returns, and regulators are leaning on them to retain earnings rather than distribute them. Many respondents felt that the investmentHowever, market had there yet toare adjust still topotential these new problems, realities, withthe mathe inresult one that being return cost. The days when expectationsbanks remained made unrealisticallysuper profits high. and Peterpaid Woutilson-Smith, generous directordividends of Meritus are past. Today's banks Consultantsare in becoming the UK, said: utilities “The offering big issue lower for ban - ifks steadieris convincing - returns, investors and thatregulators are leaning they can geton backthem to to a retainposition earnings where returns rather on than equity distribute will exceed them. cost Many of capital. respondents If felt that the they cannotinvestment do that it willmarket be difficult had yet to toraise adjust capital.” to these It was new also reupalities, to the bankswith theto result that return seek longer-termexpectations shareholders remained who preferredunrealistically stability high. to volatile Peter returns. Wilson-Smith, director of Meritus Consultants in the UK, said: “The big issue for banks is convincing investors that they can get back to a position where returns on equity will exceed cost of capital. If they cannot do that it will be difficult to raise capital.” It was also up to the banks to seek longer-term shareholders who preferred stability to volatile returns.

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 23 C S F I / New York CSFI

Some respondentsSome respondents took the viewtook thatthe whileview bankthat retuwhilerns havebank fallen,returns the have risks fallen, the risks remain remainhigh, particularly high, particularly with the newwith bail-in the newregimes bail-in that regulatorsregimes thatand regulators and governmentsgovernments are introducing. are introducing. A UK respondent A UK said respondent that “banking said profitabilitythat “banking has profitability has 'At'At some some point, point, failed tofailed recover to inrecover Europe into Europelevels that to wouldlevels en thatcourage would investors encourage to invest investors in to invest in reality will hit Somebanks”. respondents banks”.Banks have Banks took succeeded the have view succeededin raisingthat while considerabl in bankraising retue amountsconsiderablrns have of capitalfallen,e amounts inthe the risks formof capital in the form reality will hit remainof hybrid high,of contingent hybrid particularly contingent convertible with convertible bonds,the new though bail-in bonds, one regirespondent thoughmes thatone said regulatorsrespondent “at some point,and said “at some point, however, reality will hit the COCO market”. the COCO governmentshowever, are introducing. reality will A UKhit therespondent COCO said market”. that “banking profitability has the COCO 'At some point, failed to recover in Europe to levels that would encourage investors to invest in market' banks”.This risk Banks was have of greater succeeded concern in raising to bankers considerabl (who eranked amounts it No.of capital 7) than in tothe outside form reality market' will hit ofobservers hybrid Thiscontingent who risk ranked wasconvertible it inof thegreater high bonds, teens.concern though It also oneto rankedbankers respondent higher (who said in emergingranked “at some it markets point,No. 7) than to outside the COCO however,where balance observersreality willsheets whohit theare ranked COCOmore fragile itmarket”. in the and high access teens. to Itcapital also rankedcan be harder.higher Thein emerging markets principalwhere manager balance of a bank sheets in Nigeria are more said thatfragile “current and market access conditions to capital are cannot be harder. The market' Thisfavourably risk principalwas disposed of greater manager to raisingconcern of capital”, ato bankbankers andin (whoNigeriathe ch rankedief said financial it that No. “cofficer7)urrent than of to marketa outside bank in conditions are not observersHong Kongfavourably who was ranked concerned disposedit in the about high to “increasedteens.raising It alsocapital”, capital ranked sc and arcityhigher the and in ch emerging inabilityief financial tomarkets pursue officer of a bank in wherenew businessbalanceHong due sheetsKong to capital arewas more concernedrestraints.” fragile andabout access “increased to capital capital can besc arcityharder. andThe inability to pursue

principal newmanager business of a bank due into Nigeriacapital saidrestraints.” that “current market conditions are not favourably disposed to raising capital”, and the chief financial officer of a bank in

Hong14. KongInterest was concerned rates about (12) “increased capital scarcity and inability to pursue

newThe business risk to banksdue to capitalfrom the restraints.” “normalisation ” of interest rates 14. Interest rates (12) AlthoughThe the risk long-anticipated to banks from reversal the “ofnormalisation quantitative easing” of interestby central rates banks, 14.particularly Interest the Federal rates Reserve, (12) dominates the outlook for interest rates, interest Therate risk risk Although toitself banks is ranked from the therelativelylong-anticipated “normalisation low precisely ”reversal of because interest of everyone rates quantitat canive see iteasing coming. by central banks, In fact this Banana Skin has dropped a couple of positions over the last year because particularly the Federal Reserve, dominates the outlook for interest rates, interest Althoughof the many the positiveslong-anticipated that interest reversal change of could quantitat bringive to banks.easing by central banks, rate risk itself is ranked relatively low precisely because everyone can see it coming. particularly the Federal Reserve, dominates the outlook for interest rates, interest rateA riserisk itselfinIn ratesfact is ranked thiswill Bananawiden relatively net Skin interestlow has precisely marginsdropped because (NI a coupleMs) everyone and of bring po cansitions thesee itprospect overcoming. the of last year because Ingreater fact this profitabilityof Banana the many Skin for positives hasbanks, dropped the that main a coupleinterest question of change po beingsitions couldwhether over thebring this last towill year banks. be because enough ofto the offset many the positives inevitable that rise interest in bad change debt couldas borrowers bring to banks.struggle to meet higher loan costs. ThereA rise was in an rateseven divisionwill widen of opinion net interestabout this. margins (NIMs) and bring the prospect of A rise ingreater rates will profitability widen net interestfor banks, margins the main(NIMs) question and bring being the prospectwhether of this will be enough greaterThe chief profitability risk officer for banks,of an theAustralian main question bank said being that whether “loan lossesthis will may be increase,enough howeverto profits offset will the improve,inevitable potentially rise in badoffsettin debtg asthe borrowers losses”, and struggle the senior to meet higher loan to offset costs.the inevitable There wasrise inan badeven debt division as borrowers of opinion struggle about to meetthis. higher loan costs.president There of was finance an even at divisiona large Canadianof opinion bank about said this. that “higher interest rates may Central banks generate higher loan losses, however deposit margins would improve.” will proceed The chiefThe risk chiefofficer risk of anofficer Australian of an bank Australian said that bank“loan saidlosses t hatmay “loan increase, losses may increase, howeverHowever howeverprofits there willwas profits improve,also awill strongpotentially improve, camp offsettin whichpotentially gbelieved the losses”,offsettin that andcreditworthinessg thethe losses”,senior and the senior cautiously on presidentgenerally presidentof was finance fragile ofat andafinance large that Canadianhigher at a largeborrowing bank Canadian said costs, that comingbank“higher said oninterest top that of rates “highercollapsing may interest rates may CentralCentral banks banks generatecommodity highergenerate prices, loan higher losses,overblown loanhowever losses,property deposit however markets margin depositsand would stressed improve.”margin governmentss would improve.” could interest rates cause a lot of damage. A US banker said that “while banks should be on average

will will proceed proceed beneficiaries of increased NIMs (unless they are excessively professional markets However Howeverthere was therealso awas strong also camp a strongwhich believedcamp which that creditworthinessbelieved that creditworthiness cautiously on generallyfunded), wasthe fragilereal risk and will that comehigher fromborrowing governments costs, coming that have on top disastrous of collapsing fiscal cautiously on commoditypolicies generallyand prices, cannot overblownwas manage fragile their property and debt that service markets higher requi and borrowingrements; stressed institutions governmentscosts, coming that couldcannot on top of collapsing interest rates causehandle a lotthecommodity of interest damage. rates prices,A USand banker inflationoverblown said that that areproperty “while occurring, banksmarkets and should individuals and be stonressed averagewho aregovernments could interest rates beneficiariesdevastatedcause byof theincreaseda lot spike of indamage.NIMs interest (unless Apayments US they banker areand ex loss cessivelysaid of that debt professional“while service bankscapacity.” markets should A be on average funded),Canadian beneficiariesthe banker real risksaid willthatof increased“thecome unusually from NIMs governments long (unless low i nterestttheyhat have arerate ex disastrousenvironmentcessively fiscal professionalwill markets policieshave almost andfunded), cannot certainly managethe caused real their riska lack debt will of service discipline come requi frominrements; lending governments institutionsdecisions that thatthat will cannot have only disastrous fiscal handlesurface the whenpolicies interest rates and ratesnormalize.” cannot and inflation manage that their are debtoccurring, service and requi individualsrements; who institutions are that cannot

devastatedhandle by the thespike interest in interest rates payments and inflation and loss that of debt are serviceoccurring, capacity.” and individualsA who are CanadianThere was, banker however, said thatbroad “the agreement unusually that long this low is an interest area where rate environmentcentral banks will will haveproceed almost devastatedcautiously certainly to causedby avoid the adisruption.spike lack ofin discipline interest A UK centra ipaymentsn lendingl banker decisions and said loss this that of“is will debtnot onlya servicebig capacity.” A surfacedeal as when itCanadian will rates happen normalize.” banker slowly”. said Paul that Smee, “the director unusually general long of lowthe UK's interest Council rate of environment will Mortgagehave Lenders, almost said certainly that “the causedspeed of a normalisalack of disciplinetion is more i nimportant lending thandecisions the that will only Thereprocess was, surfaceitself”. however, A when minority broad rates agreement of normalize.” sceptics that still this doubt is aned areathat wherenormalisation central bankswould willeven proceed cautiously to avoid disruption. A UK central banker said this “is not a big deal as it Therewill happen was, slowly”.however, Paul broad Smee, agreement director general that this of theis anUK's area Council where of central banks will Mortgage proceed Lenders, cautiouslysaid that “the to speed avoid of disruption. normalisation A isUK more centra importantl banker than said the this “is not a big process itself”.deal as A itminority will happen of sceptics slowly”. still doubt Pauled Smee, that normalisation director general would of even the UK's Council of Mortgage Lenders, said that “the speed of normalisation is more important than the process itself”. A minority of sceptics still doubted that normalisation would even

24 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

happen because central banks lacked the confidence to reverse a situation - and a psychology - that had become so deeply embedded in the last seven years. happen because central banks lacked the confidence to reverse a situation - and a psychology - that had become so deeply embedded in the last seven years. This was a risk on which there were no marked differences of view among classes of This was arespondent risk on which - all there of werethem no placing marked it differences in the mid of to view low among teens. classes of respondent - all of them placing it in the mid to low teens.

15. Emerging15. Emerging markets markets (17) (17) The risk toThe banks risk from to banks volatility from in emerging volatility marke in emergingts markets

Concern aboutConcern emerging about market emerging risk is market rising, thoughrisk is possiblyrising, thoughnot as much possibly as might not as much as might be expectedbe givenexpected the gloomygiven theheadlines gloomy from headlines China and from worsening China political and worsening and political and ChinaChina is the is the economic economicconditions inconditions many parts in of many the emerging parts of w theorld. emerging world. obvious focus obvious focus A US respondentA US respondent predicted that predicted “disruptions that in “disruptions the Middle East, in the North Middle Africa East, and North Africa and China will have a significant negative effect on the world economy in 2016.” A China will have a significant negative effect on the world economy in 2016.” A Japanese respondent said that “rising insolvencies in China and slowed growth rate in emergingJapanese economies respondent will have said negative that “risingimpacts insolvencieson global liquidity in China and money and slowed growth rate flow whichin could emerging cause higheconomies volatility will and worldwidhave negativee financial impacts instability.” on global liquidity and money flow which could cause high volatility and worldwide financial instability.”

“It is quite alarming how little attention has been paid to the Chinese banking

sector [which“It islooks] quite primed alarming to be how the next little catalyst attention for ahas global been financial paid tocrisis. the Chinese banking Key risk factors include the sheer magnitude of the sector and of individual banks, [...]sector the opacity [which of theirlooks] balance primed sheets, to be the the size next of non-performingcatalyst for a globalloans financial crisis. receiving continuedKey risk factorsstate support include via themultiple sheer means, magnitude and the oflack the of sectorsystemic and of individual experiencebanks, in China [...] in thehandling opacity a large of their scale balance financial sheets,crisis.” the size of non-performing loans Bank directorreceiving continued state support via multiple means, and the lack of systemic Canada experience in China in handling a large scale financial crisis.” Bank director Although respondentsCanada voiced concerns about a variety of areas and countries (Middle East, North Africa, Brazil, Nigeria etc.) most of them came back to the main focus:Although China. “The respondents spectre of avoiced declining concerns Chinese economyabout a andvariety the resulting of areas and countries impact on world markets is concerning”, according to a chief risk officer in Canada. There are (Middlemultiple concerns:East, North the fragilityAfrica, of Brazil, the Chinese Nigeria financial etc.) system,most ofthe them scale came back to the of non-performingmain focus: loans, China. inadequate “The informationspectre of aboa decliningut banks' balanceChinese sheets, economy and and the resulting the widerimpact ripple effecton world - particularly markets ison concerning”, other parts of according the emerging to a worldchief risk- of officer in Canada. slowing demandThere arefor multiplecommodities. concerns: The chief the risk fragility officer of at thea large Chinese bank financialin Hong system, the scale Kong saidof that non-performing credit risk in mainland loans, China inadequate will be “highinformation in the next abo twout yearsbanks' due balance sheets, and to slower theeconomic wider growth,ripple effecthigher bad- particularly loan rates andon highother risk par ints overcapacityof the emerging world - of industries.slowing This will demand give concern for commodities. to banks in manyThe chiefparts riskof the officer world atwhere a large bank in Hong economies are highly related to or dependent on the China economy.” Kong said that credit risk in mainland China will be “high in the next two years due But manyto respondents slower economic were more growth,relaxed about higher the badoutlook, loan noting rates that and direct high bank risk in overcapacity exposure industries.to the emerging This worldwill giveand Chinaconcern in particuto bankslar is in more many a matterparts forof the world where individualeconomies banks than theare system highly as related a whole. to Geogra or dependentphically, ona lot the of Chinathe exposure economy.” is in Europe and the Far East and less in North America. Emerging market crises (or LDC crisesBut as manythey were respondents known in werethe old more days) relaxed are also aboutnothing the new: ou tlook,banks havenoting that direct bank ridden a numberexposure of them to thesuccessfully. emerging world and China in particular is more a matter for individual banks than the system as a whole. Geographically, a lot of the exposure is in Europe and the Far East and less in North America. Emerging market crises (or LDC crises as they were known in the old days) are also nothing new: banks have ridden a number of them successfully.

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 25 C S F I / New York CSFI

The underlying concern is the macro-economic one whether the EM slowdown will drag the rest of the world down too, exposing banks to wider loses in their home markets. Many respondents felt this could happen. A UK banker warned: “Second order impacts need to be watched .” The underlying concern is the macro-economic one whether the EM slowdown will drag the rest of the world down too, exposing banks to wider loses in their home markets. ManyHow respondents emerging felt this economies could happen. Asee UK itbanker warned: “Second order impacts need to be watched .” South Africa. “I expect the African banking industry to face significant challenges in the next 2-3 years on the back of a very challenging macro- How emergingeconomic environment economies with see slowing it economic growth, commodity prices under pressure for longer, volatile equity and capital markets [and] negative sentiment South Africatowards. “I expectemerging the African markets. banking” industry to face significant challenges in the next 2-3 years on the back of a very challenging macro- economicMexico. environment “Expectations with slowing of economic a rise in growth,rates in commodity the US are prices feeding under unease into the pressure for longer, volatile equity and capital markets [and] negative sentiment towardsfinancial emerging markets.markets.” That may add to [a] flight-to-quality, leaving emerging markets in turmoil.” Mexico. “Expectations of a rise in rates in the US are feeding unease into the financialSingapore. markets. That “ [Themay addrisk to is] [a] macro-economic flight-to-quality, leaving instability emerging in Asia markets as the US and in turmoil.Europe” return to a normal interest rate environment.”

Singapore.Taiwan. “[The “riskAlthough is] macro-economic many emerging instability market in Asia economies as the US haveand enhanced their Europe return to a normal interest rate environment.” policy frameworks and resilience to external shocks, several key economies face Taiwan.substantial “Although many domestic emerging imbalances market economies and lower have growth. enhanc Recented their market policy frameworksdevelopments and resilience such as to slumping external shockscommodity, several prices, key economies China’s burstingface equity substantialbubble domestic and imbalancespressure on and exchange lower growth. rates Recent underscore market these challenges.” developments such as slumping commodity prices, China’s bursting equity bubble andPeru. pressure “In emerging on exchange markets, rates underscoreexposure tothese changing challenges. trends” in interest rates, flows, commodity prices and currencies may have major effects on companies and Peru. “In emerging markets, exposure to changing trends in interest rates, flows, commodityindividuals prices and that currencies have been may increasinghave major effetheircts leverag on companiese. [...] Certainand institutions are individualsunprepared that have beenfor a increasing downturn. their” leverage. [...] Certain institutions are unprepared for a downturn.”

16. Shadow16. Shadow banking banking (20) (20) The riskThe to banks risk to from banks hedge from funds hedge and otherfunds “ shadowand other” banking “shadow ” banking institutions,institutions, for example for exampleas competition as competition or sources of or volatility sources of volatility

WorriesWorries about theabout rapid thegrowth rapid of growththe shadow of thebankin shadowg sector, bankin its “unfair”g sector, its “unfair” FinancialFinancial competitivecompetitive advantages, advantages, the lack of theregulation lack of and regulation its potential and to itschange potential the face to ofchange the face of activity is bankingbanking are growing. are growing. activity is The competitive threat posed by “shadow banks” (i.e. non-bank institutions which moving towards The competitive threat posed by “shadow banks” (i.e. non-bank institutions which moving towards offer bank-type services such as loans, investments and payment services) was thethe unregulated unregulated summedoffer up by bank-type the head of servicesfinancial managementsuch as loans, at a large investments French bank and who payment feared services) was sector that a tightersummed regulatory up by frameworkthe head of would financial “promote management banking disintermediation at a large French and bank who feared sector challengethat financial a tighter institutions' regulatory business framework models. wouldWhile banks “promote continue banking to strengthen disintermediation and their financialchallenge structure, financial new institutions' players operating business in models.a less regulated While banksenvironment continue to strengthen emerge theirin an increasinglyfinancial structure, competitive new market.” players Most operating respondents in blamed a less excessive regulated environment regulationemerge of the in mainstream an increasingly financial competitive sector for t hismarket.” trend. But Most some respondents felt it was ablamed excessive consequenceregulation of what of one the of mainstream them described financial as the ba sectornks' “inward” for this focus trend. and Butfailure some felt it was a to keep up with a fast-changing market. consequence of what one of them described as the banks' “inward” focus and failure to keep up with a fast-changing market.

26 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

Specific concerns centred on the shadow banks' ability to “cherry pick” the most profitable parts of the market, and use their more lightly regulated status to undercut traditional banks. The head of compliance at a large Portuguese bank said that “financial institutions are too busy preparing themselves to comply with all the new (non-stop) regulations while shadow banks (without any regulation) are growing in economic influence.”

Another frequently mentioned danger was the risk to the financial system as the unregulated sector grows in importance. A banking regulator said that “financial activity continues to move towards less-regulated shadow banks, thereby adding to systemic risks.” Shadow banks are seen as more vulnerable to cyber crime and fraud; one respondent feared there would be “a failure in the shadow banking world as peer to peer lenders find their credit models are not as good as they thought”.

"New regulation has already hurt institutions. But more importantly it is driving the most vulnerable segments of society into the hands of unregulated shadow lenders who will have none of the constraints a regulated institution has, nor any of the ‘governors’ that a transparent firm has. The most vulnerable are being driven into the hands of the most ruthless.” Senior executive US money centre bank

The question is whether these fears are overdone or whether, as one respondent said, developments so far are only the thin end of a much larger fintech wedge that “is going to undermine the core businesses of banks”. A respondent from Singapore foresaw “more shadow banks and underground banking systems springing up which could be unsafe for customers...and impact the economy a great deal.”

Not surprisingly, perhaps, bankers rated this risk more highly than non-bankers. Geographically concern was highest in North America and the Far East.

17. Currency (22) The risk to banks from volatility in the foreign exchange markets

Currency risk is rising, but from a low base. Despite recent events - the euro crisis, the Swiss revaluation etc. - currency risk does not score high because this is one risk the banks should be equipped to manage and hedge against. The greater risk is that banks might suffer indirectly through losses sustained by their clients, or by shadow banking institutions causing disruptions to the market.

A particular concern is the euro whose future remains unresolved. Neil Record, chairman of Record Currency Management in the UK, said that “European banks may have divested themselves of much of the most toxic state debt, but the euro is enforcing artificial prices across the EU, and that includes artificial asset values. If the political will to hold the Euro together weakens, this could seriously threaten the stability of the European (and therefore the global) banking sector.”

Generally, concern about this risk was higher in emerging than in developed markets because of the impact of currency volatility - and a strong dollar - on commodity markets. Its highest rank (No. 5) was in the Middle East. One respondent saw a long term business risk in disintermediation technology which connected buyers and sellers, wiping out the margins earned by banks on FX transactions.

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 27 C S F I / New York CSFI

18. Liquidity (15) 18. LiquidityThe risk that (15) banks will encounter liquidity problems The risk that banks will encounter liquidity problems

LiquidityLiquidity risk has receivedrisk has considerablereceived considerable attention from attention banks and from regulators banks inand the regulators in the last18. few Liquiditylast years, few with years, the (15)result with thatthe concernresult that about concern it continues about to it fall continues sharply (this to fall was sharply (this was ratedThe theriskrated top that riskthe banks whentop willrisk the encounter whenfinancial the crisisliquidity financial burst proble incrisis 2008).ms burst Liquidity in 2008). is, in Liquiditygeneral, is, in general, abundant abundant even if it evenremains if it fenced remains in by fenced regulatory in by or regulatorynational barriers. or national barriers. Big liquidity Liquidity risk has received considerable attention from banks and regulators in the Big liquidity Alast number fewA years, numberof respondents with of the respondents result made that the concernpoint made that theabout liquidity point it continues thatrisk isliquidity a to bit fall like sharply risk lightning is (this a bit - wasno like lightning - no buffers can onerated knows theone top whenknows risk and when when where the and itfinancial will where strike. crisis it Butwill burst with strike. in banks 2008). But managing Liquiditywith banks their is, in managingliquidity general, their liquidity buffers can abundant even if it remains fenced in by regulatory or national barriers. positionspositions much more much carefully, more andcarefully, central banksand central standing banks by to stinterveneanding byat the to firstintervene at the first reducereduce this this risk risk sign of trouble, the risk of such a crisis is much diminished. The chief risk officer of Big liquidity aA bank number signin Spain of of respondents trouble,said that the“this made risk risk the of ispoint such reduced that a crisis liquiditysince is institutions much risk is diminished.a bit have like to lightning keep The much chief- no risk officer of buffers can largerone knows liquiditya bank when buffersin andSpain forwhere saidregulatory it thatwill “thisstrike.purposes. risk But A iswithlthough reduced banks still managingsin to cebe testedinstitutions their in aliquidity crisis, have to keep much thesepositions bufferslarger much should liquidity more allow carefully, buffers institutions and for central regulatoryto be morebanks resilient”. purposes.standing by A tolthough intervene still at theto befirst tested in a crisis, reduce this risk sign ofthese trouble, buffers the risk should of such allow a crisis institutions is much diminished. to be more The resilient”. chief risk officer of Whata bank concerns in Spain there said thatwere “this centred risk ison reduced two points. since Oneinstitutions is the haverisk tothat keep tougher much liquiditylarger Whatliquidity requirements concerns buffers for inthere regulatorybanking were purposes. marketscentred Aareonlthough twoconstraining stillpoints. to be othertestedOne isinmarkets, athe crisis, risk that tougher particularlythese buffersliquidity those should requirements tradingallow institutions securities, in to banking bewhich more resilient”.couldmarkets have are wider constraining economic other markets, consequences and could even require central bank intervention. Robert de Metz, chairmanWhat particularlyconcerns of Dexia there in Belgium, thosewere centred tradingsaid that on “thetwosecurities, mainpoints. risk One whichis a isliquidity thecould risk risk that spreadinghave tougher wider economic overliquidity creditconsequences requirementspapers of all and kindsin could bankingheld byeven non-bankingmarkets require are institutionscentral constraining bank which inothertervention. could markets, have aRobert de Metz, disastrousparticularlychairman impact those onof regulatedDexiatrading in financialsecurities, Belgium, institutions saidwhich that couldbecause “the mainhave of the rwiderisk IFRS is obsessionaeconomic liquidity risk spreading withconsequences so-calledover credit 'markand couldpapersto market' even of rules.” allrequire kinds The central heldother bybankis thatnon-banking in thetervention. impact of institutionsRobert the reversal de Metz, which of could have a quantitativechairmandisastrous of easing Dexia remainsimpact in Belgium, oneon ofregulated said the thatgreat “the financialunknow mainns. r iskinstitutions is a liquidity because risk spreading of the IFRS obsession over creditwith papersso-called of all 'mark kinds to held market' by non-banking rules.” The institutions other is whichthat the could impact have ofa the reversal of Thisdisastrous wasquantitative a impactrisk that on easing particularlyregulated remains financial concerned one institutions of smaller the great banksbecause unknow and of thosethens. IFRS in emergingobsession marketswith so-called which might'mark beto market'the first rules.”to suffer The in othera crisis. is thatThe the chief impact risk officerof the reversalat a bank of

inquantitative Nigeria said easing that remains “Some onebanks, of the due great to theirunknow smalns.ler size, greater exposure to poorly performingThis was businessa risk that sectors, particularly or exposures concerned to high risk smaller economic banks sectors, and may those in emerging sufferThis fromwasmarkets aclient risk which andthat depositorparticularly might 'flightbe concernedthe to first quality to smaller '.”suffer banksin a crisis. and those The inchief emerging risk officer at a bank marketsin which Nigeria might said be thethat first “Some to suffer banks, in a crisis. due Theto their chief risksmal officerler size, at a bankgreater exposure to in Nigeriapoorly said performing that “Some business banks, due sectors, to their or smalexposuresler size, to greater high riskexposure economic to sectors, may poorlysuffer performing from business client and sectors, depositor or exposures 'flight toto high quality risk '.”economic sectors, may 19.suffer Corporate from client and depositorgovernance 'flight to quality (8)'.” Boards can The risk that weakness at board level will lead to poor oversight and control of banks have only ‘a shallow Corporate19. Corporate19. governance Corporate risk governance is the governancebiggest faller (8) in this survey. (8) Geographically, it BoardsBoards can can ranked second from bottom in the Far East Pacific and North America, though it was understanding’ The riskThe that risk weakness that weakness at board levelat board will lead level to willpoor lead oversight to poor and oversight control and control havehave only only ‘a ‘a higherof banks inof Europe banks (at No. 14). of their banks TheCorporate extent ofgovernance this fall is riskdifficult is the to reconcilebiggest faller with inthe this many survey. negative Geographically, comments we it shallowshallow Corporate governance risk is the biggest faller in this survey. Geographically, it received,rankedranked second but some secondfrom respondentsbottom from in bottom the did Far note Eastin the improvementPacific Far East and NorthPacifics. The America, aheadnd Northof though regulatory America, it was though it was understanding’ affairshigher at in a Europe bank in (at France No. 14). said: “Given the numerous CEOs fired by their boards, it understanding’ higher in Europe (at No. 14). of their banks seems that they are increasingly fulfilling their oversight role with teeth. This is of their banks good”.The extent Sriraghavan of this fallRajamannar, is difficult senior to reconcile vice-president with the at many Bank negative Danamon comments Indonesia, we said:received, “TheThe boardbut extent some and of seniorrespondents this managementfall is diddifficult note are improvementmoreto reconcile aware abouts. wTheith regulations thehead many of andregulatory negative other comments we mandatoryaffairs received,at agovernance bank inbut France activities.some said: respondents “GivenThey also the take numerodid eff noteortsus CEOs toimprovement know fired the by risk theirs. side Theboards, of thehead it of regulatory regulatoryseems affairsthat controls.” they at area bank increasingly in France fulfilling said: “Given their oversight the numero role uswith CEOs teeth. fired This byis their boards, it good”.seems Sriraghavan that theyRajamannar, are increasingly senior vice-president fulfilling at their Bank oDanamonversight Indonesia,role with teeth. This is Butsaid: the “Thegood”. main board Sriraghavanthrust and seniorof the management Rajamannar,comments arewas seniormore that awa vice-presidentboardrre aboutooms regulations have at Banktoo and many Danamonother Indonesia, expectationsmandatory governance placed on activities.them and They possess also taketoo efflittleorts relevant to know knowledgethe risk side to of bethe said: “The board and senior management are more aware about regulations and other effective.regulatory In controls.” many cases this was not a criticism of individuals so much as an observation mandatory that institutions governance have activities. become so They vast alsoand takecomplex, efforts operating to know in thean risk side of the But theregulatory main thrust controls.” of the comments was that boardrooms have too many expectations placed on them and possess too little relevant knowledge to be effective.But In the many main cases thrust this wasof notthe a commentscriticism o f wasindividuals that boardrso muchooms as anhave too many observationexpectations that institutions placed haveon thembecome and so vastpossess and complex,too little operating relevant in knowledgean to be effective. In many cases this was not a criticism of individuals so much as an observation that institutions have become so vast and complex, operating in an

28 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

impenetrable regulatory climate across multiple jurisdictions, that board members can at best have only a shallow understanding of the risks they face.

This means that boards are often unable “Board directors are increasingly impenetrableto find regulatory the right climate questions across multiple to challenge jurisdictions, being that expectedboard members to be all things to all can at bestthe have information only a shallow that understanding management of chooses the risks theyregulators. face. They will fail”. to provide to them. A consultant in Non-executive director This means that boards are often unable Canada warned: “Weakness, arrogance,“Board directors UK arebank increasingly to find theand right concentrations questions to challenge of powerbeing expected[in to be all things to all the informationmanagement] that management without chooses adequate regulators.governance They are will serious fail”. risks”. A banker in the UK to provide to them. A consultant in said: “It does not seem to me thatNon-executive banks have director really changed the nature of their Canada warned: “Weakness, arrogance, UK bank and concentrationsboards, just ofthrown power even [in more paper and procedures at them, so they will management]progressively without adequate lose sight governance of the risks”. are serious risks”. A banker in the UK said: “It does not seem to me that banks have really changed the nature of their boards, justYet thethrown point even was more also madepaper thatand overlyprocedures conservativ at them,e boardsso they risk will stifling innovation. progressivelyA senior lose sight operations of the risks”. banker in Canada said a “huge challenge” over the next few years is “very heavy governance decreasing banks’ agility”, adding that banks “need Yet the pointto be was able also to madetake thatbusiness overly decisions conservativ ande boards actions risk more stifling rapidly”. innovation. A senior operations banker in Canada said a “huge challenge” over the next few years is “very heavy governance decreasing banks’ agility”, adding that banks “need to be able to take business decisions and actions more rapidly”. 20. Management incentives (21)

The risk to banking soundness and reputation from poorly designed 20. Managementincentive structures. incentives (21) The risk to banking soundness and reputation from poorly designed incentiveThe structures. risk to banks from poorly designed incentive structures continues to be seen as

The risk tolow, banks but from (unsurprisingly) poorly designed there incentive was st aructures pronounced continues sp tolit bebetween seen as those inside and low, but outside(unsurprisingly) the industry: there wasbankers a pronounced ranked it spNo.lit 22between whil ethose observers inside hadand it at No. 11. outside the industry: bankers ranked it No. 22 while observers had it at No. 11. Several respondents pointed to tangible improvements in recent times. “Deferral, Several respondentsclaw back pointedand value to tangible requirements improvement means in thatrecent this times. thr eat“Deferral, has been significantly claw backdiminished”, and value requirements said the head mean of thatrisk thisstrategy threat athas a babeennk significantlyin the UK. In China, a risk diminished”,manager said the said: head “Banks of risk havestrategy been at aimproving bank in the management UK. In China, incentives a risk by increasing manager said: “Banks have been improving management incentives by increasing the proportionthe proportion of incentives of designed incentives to encourage designed longer to encourage term decision longer making”. term decision making”.

While someWhile credited some regulatory credited reform regulatory for making reform a difference, for making there a difference,was also much there was also much scepticism.scepticism. One respondent One respondentsaid that “the said incentive that “theis thereincentive for the is revenue there for the revenue IncentivesIncentives for for generators;generators; it should be it thereshould for bethe theregate keepers for the of gate risk”. keepers There wasof risk”. also a Therefeeling was also a feeling risk managers, that banksthat were banks “out wereof kilter “out with of thekilter real withworld”, the as real one world”,respondent as putone it. respondent The put it. The risk managers, chief riskchief officer risk of officeran investment of an bankinvestment in Nigeria bank said: in “Management'sNigeria said: “Management's not just remunerationremuneration is often linked is often to the linked achievement to the ofachievement macro earnings of targetsmacro thatearnings are targets that are not just disconnected from economic and client realities”. Others saw banks lending “a tin rainmakers ear to publicdisconnected concern about from executive economic compensation and client and realities”. the lack ofO thersaccountability saw banks lending “a tin rainmakers for performance”.ear to public concern about executive compensation and the lack of accountability for performance”. A senior manager at a large bank in the US argued that the debate over pay structuresA was senior a distraction manager from at aa morelarge important bank in issue. the “TheUS arguedbigger concernthat the is debate over pay whether structuresthe wrong waspeople a distractionare being allowedfrom a intomore man importantagement toissue. start “Thewith. bigger concern is Regulatorswhether should bethe flexing wrong their people muscles are and being not allowing allowed people into withoutmanagement core to start with. skills to inhabit the senior management offices”. David Miles, an independent strategic Regulatorsand actuarial should advisor be in flexing the UK, their said muscles that “current and notplans allowing to regulate people without core remunerationskills and to bonuses inhabit will the just senior drive themanagement best individuals offices”. into sectors David less Miles, well an independent regulated”.strategic and actuarial advisor in the UK, said that “current plans to regulate remuneration and bonuses will just drive the best individuals into sectors less well regulated”.

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21. Derivatives (18) The risk that banks will suffer losses through their dealings in derivatives and structured products

The risk to banks from derivatives and structured products, a Banana Skin that made 21. Derivativesthe top ten of each (18) edition of this survey between 2000 and 2010, is now considered The risklower that banks order willin everysuffer regionlosses wethrough looked their at. dealings in derivatives and structured products

The risk to“The banks notional from derivatives value of and global structured derivative products, aThis Banana is Skin because that made memories of the the top ten contractsof each edition outstanding of this survey exceeds between $650 2000 and 2010,global is nowfinancial considered crisis are still vivid, lower ordertrillion. in every A regionmere 1%we looked of derivatives at. gone the appetite for complex products has wrong could cause losses of nearly $7 generally fallen, and controls – in “The notionaltrillion”. value of global derivative This is becauseterms memories of both ofregulation the and internal contractsRobert outstanding Jenkins exceeds $650 global financial crisis are still vivid, trillion. A Seniormere 1% Fellow of derivatives gone the appetite forrisk complex management products has– are tight. “AIG wrong couldBetter cause Markets losses of nearly $7 generally fallen,was and a controlsgenerational – in scare. Banks trillion”. should have learnt about counter-party Robert Jenkins terms of both regulation and internal Seniorrisk, Fellow at least systemically”, said riskan observer management of t he– industryare tight. in“AIG the UK. The head of Better financeMarkets at a bank in Luxembourgwas described a generational the threat scare. as beingBanks curbed by “good systems, skilled traders, limited bonusesshould have and learnt monit aboutoring counter-party of trading limits”. risk, at least systemically”, said an observer of the industry in the UK. The head of finance at a bank in Luxembourg described the threat as being curbed by “good systems,But skilled many traders, respondents limited bonuses were and monitmoreoring anxious of trading about limits”. the longer-term prospects, particularly if banks fail to hit their profitability targets and turn to “a new But manygeneration respondents of traderswere more and structurers…anxious about toothe younglonger-term to have prospects, the required caution”. particularlyThere if bankswas afail feeling to hit thattheir seniorprofitabili managementty targets and teams turn into “aparticular new are not well generationequipped of traders to andcontrol structurers… this risk too because young tothey have do the not required really caution”.understand it. The sheer There wasscale a feelingof the marketthat senior makes management derivatives teams potential in particular “weapons are ofnot wealth well destruction”, as equippedone to controlrespondent this riskput it.because they do not really understand it. The sheer scale of the market makes derivatives potential “weapons of wealth destruction”, as one respondent put it. Ian Dowson, managing director of William Garrity Associates in the UK, warned Ian Dowson,that lossesmanaging are director“almost of a Williamcertainty” Garrity because Associates “there in is theno UK,standardisation warned of derivative 2 that lossesproduct are “almost construction, a certainty” no because accurate “there VAR is no standardisationin real time ofreporting derivative and no real open product marketconstruction, in derivatives no accurate with VAR central2 in real clearing”. time reporting and no real open market in derivatives with central clearing”.

22. Human22. Human resources resources (23) (23) The riskThe that riskbanks that will banks have difficulty will have attracting difficulty and attracting retaining talentand retaining in the talent in the present presentenvironment environment

PlentyPlenty of of While theWhile risk that the banks risk thatwill havebanks difficulty will have attr actingdifficulty and retainingattracting talent and continues retaining talent continues bankers to appearto wellappear down well these down rankings, these the rankings, comments the we commentsreceived gave we areceived more gave a more bankers conflictedconflicted impression. impression. Anxiety was Anxiety higher inwas the higherFar East in Pacific the Fa regionr East and Pacific North region and North available, but America, which both ranked this at No. 14. available, but America, which both ranked this at No. 14. areare they they the the Those who saw this Banana Skin as a low threat pointed to the fact that banks are ‘right’ kind? generallyThose cutting who their saw headcounts this Banana in the Skin current as calimate low threatto reduce poin coststed to– whichthe fact that banks are ‘right’ kind? means theregenerally should cuttingbe relatively their more headcounts talent availa in blethe forcurrent the jobs climate that remain. to reduce At costs – which the samemeans time, the there consensus should was be that relatively pay remains more attractive, talent availa particularlyble for in thea tough jobs that remain. At economicthe environment same time, with the risingconsensus unemployment was that inpay ma remainsny regions. attractive, “Not really particularly a in a tough risk in theeconomic grand scheme environment of things withbecause rising banks unemployment pay higher than in the ma mainstreamny regions. “Not really a average, riskeven inat CEOthe grand level”, schemesaid a risk of manager things inbecause the UK. banks pay higher than the mainstream

average, even at CEO level”, said a risk manager in the UK.

2 Value at risk, a statistical technique used to measure and quantify financial risk

2 Value at risk, a statistical technique used to measure and quantify financial risk

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One opposing view is that while qualified people may not be in short supply, much of what was considered ‘talent’ before the crisis is not what banks need now. In the words of a US observer, “the more difficult task will be attracting talent who conduct banking practices in a manner that will regain public trust in banks”. Another concern is that ever more convoluted regulatory requirements are reducing the appeal of banking as a career. “The hostile political, social and regulatory environment has led to an industry brain drain that shows no sign of ending”, said a banking consultant in the UK.

A repeated point was that the industry is in danger of losing its most talented people to the technology sector in particular, with the growing allure of fin-tech companies and start-ups. “Banks are unable to limit staff attrition rates, as their product specialists move to competing industries such as payment solutions companies”, said a finance director at a bank in India.

23. Reliance on third parties (24) The risk from outsourcing or off-shoring activities

Banks' reliance on third parties to carry out parts of their operations continues to be seen as a low ranking risk - there haven't been serious publicised disasters. But this is clearly an issue that needs watching.

Respondents felt that banks were not fully on top of the risks, or failed to monitor their service providers adequately. Sue Milton, managing director of SSM Governance Associates in the UK, said this was an area “where boards underestimate the effort required and forget they remain responsible for the activities of the 3rd party. Knowing, continually monitoring, and holding the service supplier to account is crucial. Makes KYC a piece of cake in comparison.” A regional risk officer in Singapore said that “considering the complexity of the big banks, I strongly doubt that they all fully understand the reliance on and exposure to internal and external outsourcing.”

Among the reasons for keeping a close eye on this area are the mounting “As banks become more of a financial pressures on banks to cut costs, information business, outsourcing IT should rise higher up the totem pole growing threats to security, the use of of key issues.” new and possibly unfamiliar technology Peter Hahn to manage the outsourcing, and Senior fellow dependence by many banks on the same Cass Business School provider, resulting in a concentration of UK risk. The use of the cloud for data storage was another concern, described by one respondent as “a rising preference that is still unproven”.

Among reasons given for lower concern were the fact that banks now made less use of outsourcing, and that what there was had become more secure. The head of risk strategy at a large UK bank said that “The heightened, necessary requirements here will make things come out of the woodwork.”

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24. Sustainability (25) 24. SustainabilityThe risk to banks (25) from climate change and other environmental issues The risk to banks from climate change and other environmental issues This risk was by some distance the lowest-ranked Banana Skin in this survey, This risk was by some distance the lowest-ranked Banana Skin in this survey, finishing bottomfinishing of the bottom table inof every the table region in and every among region every and type a mongof respondent every typewe of respondent we surveyed. surveyed.

Two mainTwo reasons main were reasons given: werefirst, thatgiven: banks first, are lessthat atbanks risk thanare otherless attypes risk of than other types of BanksBanks ‘can ‘can institution,institution, particular insurers; particular and insurers;second, that and the second, threat is that “real, the but threat conveniently is “real, but conveniently very longvery term”, long as theterm”, chief asrisk the officer chief of risk a pri officervate equity of a companyprivate putequity it. company put it. adaptadapt to to ReflectingReflecting the general thetone general of the responses, tone of thea sen responses,ior bank audit a sen managerior bank in Turkeyaudit manager in Turkey environment said: “Climatesaid: change “Climate and changeenvironmental and environmental risk are serious riskissues are for se humanity.rious issues But for humanity. But environment looking at this from banks' window alone I believe the risks will be avoided through risk’ adaptation”.looking at this from banks' window alone I believe the risks will be avoided through adaptation”. risk’ However, the indirect risks from environmental disruption could still be considerableHowever, through thethe impact indirect on banks’ risks customers from andenvironmental clients, and its potentialdisruption to could still be create economic,considerable political through or geographic the impact tension. on banks’ Patricia customers Hamzahee, and founder clients, of and its potential to Integriti Capitalcreate in economic, the UK, said: political “This risk or comes geographic from banks tension. not understanding Patricia Hamzahee, the founder of impact onIntegriti their own Capital operations, in the viaUK, their said: clients, “This theirrisk comessupply fromchain banksand their not understanding the communities”. impact on their own operations, via their clients, their supply chain and their Some respondentscommunities”. thought this was an area where banks should take the lead. “I see this as an opportunity to improve a bank's image and perception of social usefulness”,Some said respondentsa respondent thought in France. this In was the anUK area, a compliancewhere ban ksofficer should said: take the lead. “I see “Banks couldthis actuallyas an increaseopportunity positive to efforts improve by offering a bank's lower image fees or anratesd forperception of social greener activity”.usefulness”, said a respondent in France. In the UK, a compliance officer said: “Banks could actually increase positive efforts by offering lower fees or rates for A few responses flagged specific concerns, such as the impact on project-based greener activity”. lending facilities for dams or power stations, and non-performing loans in the agrarian sectors of emerging economies if monsoons fail. The chief financial officer of a bank Ain Singaporefew responses cautioned flagged about complacency,specific concerns, saying: “Almostsuch as all the sectors impact of on project-based the economy,lending barring facilities agri-business, for damsunderestimate or power or underplay stations, the and longer non-performing term role loans in the of climateagrarian change sectorsand the ofenvironment emerging economieson the econom if monsoonsy and subsequently fail. The thechief financial officer financial sector.of a bank The inlonger-term Singapore correlation cautioned betwe abouten El complacency, Niño and finance saying: is yet “Almost to all sectors of be fully understoodthe economy, and acknowledged”. barring agri-business, underestimate or underplay the longer term role of climate change and the environment on the economy and subsequently the financial sector. The longer-term correlation between El Niño and finance is yet to be fully understood and acknowledged”.

32 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI Banking Banana Skins 2015 Template draft 1

And finally...the next crisis

The responses to this survey conveyed a strong sense that the global financial system is not out of the woods. In fact many respondents saw another crisis looming, triggered by events as far apart as the collapse of commodity markets or the eurozone. Here are some of the specific dangers they highlighted.

Leverage. Banks remain highly leveraged. It will not require a huge shock to topple them.

Liquidity. Although liquidity in the banking system is generally good, this is at the expense of other markets from which it is being drained, notably the securities markets which could be the crucible of a new crisis.

Culture change. Banks have not undergone enough culture change to make them less risky. They are only moulding themselves to regulatory and public expectations without cutting out their earlier failings.

Central counterparties (CCps). These represent points of high risk concentration which are inadequately regulated and could implode.

Risk management. Regulatory pressure pushes banks to focus on compliance risks rather than "real" risks. Risk management becomes robotic and insensitive.

Corporate governance. Banks are now too large and complex for boards to be able to exercise effective oversight and control over them.

Herding. The regulatory tightening encourages banks to behave in the same way, resulting in herding and over-concentration, and excessive competition.

Risk taking. The weight and cost of regulation are driving banks to take greater risks to earn profits, and pushing business into the unregulated shadow world.

34 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 33 C S F I / New York CSFI

Appendix 1

A closer look at the numbers

In the CSFI Banana Skins surveys, respondents are asked to score each risk on a scale from 1-5, where ‘5’ is the most severe. The averages of these scores are then used to produce the final rankings. The section below should be treated with caution: respondents may have different criteria about what merits a 5, for example. Nonetheless, a breakdown of the scores is revealing.

Anxiety is growing at the top of the rankings but receding elsewhere.

3.80 Top 10 risks: 2015 (dark) vs 2014 (light) 3.60

3.40

3.20 Average score Average

3.00 Credit risk Criminality Pricing of of risk Pricing economic env economic - Criminality Profitability Technology risk Technology Regulation Regulation Corporate gov Corporate Pricing of Pricing risk Business model Business Capital availability Capital Conduct practices Conduct Quality of of mgmtQuality risk Political interference Political Political interference Political Macro-economic env Macro-economic Macro

The top cluster of risks this year were seen as more severe than in 2014. However, after Banana Skin No. 5 the reverse is true – which suggests that outside the main threats to the industry, the picture is improving. Still, it should be noted that two-thirds of risks we surveyed this year were ascribed a higher than middling score (i.e. more than 3).

The difference in average scores assigned to individual risks also reveals more fallers than risers:

2015 vs 2014: average scores Risks in each column listed from greatest change (top) to smallest change (bottom)

Up > 0.15 Up < 0.15 Down < 0.15 Down > 0.15 Criminality Conduct practices Credit risk Sustainability Macro-economic envt. Currency Capital availability Corporate governance Social media Shadow banking Interest rates Derivatives Technology risk Liquidity Political interference Emerging markets Reliance on 3rd parties Pricing of risk Regulation Credit risk Human resources Mgt. incentives Quality of risk mgt. Capital availability

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As the table above shows, changes in the relative position of risks do not always tell the whole story. For example, social media and conduct practices risk, despite being the biggest climbers in this year’s rankings (both up 8 positions), saw their scores rise by considerably less than macro-economic environment risk (0.11 and 0.15 vs 0.26). Pricing of risk, political interference and derivatives fell just three positions each, but their scores all dropped by more than 0.20. An interesting anomaly was quality of risk management, which rose five positions in the rankings even though its score slipped slightly (down 0.06).

3.30 Regional breakdown: same levels of anxiety, widely Anxiety Preparedness different preparedness 3.25 While different regions emphasised some risks over others, Europe, the Far East Pacific area and North America each assigned 3.20 an average score of 3.09 to the 24 Banana Skins in this survey. However, respondents from the Far East Pacific were much more 3.15 optimistic about their ability to face these risks than those from Europe – with North America in between. 3.10

3.05 Risk managers: now closer to observers than 3.00 bankers

2.95 In 2014, the outlook of risk managers – both in terms of the severity of risks faced and the industry’s ability to deal with them 2.90 – was much closer to bankers than non-practitioners. This year the reverse appears to be true. While observers recorded the highest 2.85 anxiety levels, risk managers were the most pessimistic group when it came to preparedness.

Bankers and observers disagree most about the Bankers vs observers severity of operating and governance risks (difference in scores) Management incentives 0.53 Bankers tended to be much less anxious than industry observers about the Banana Skins individual institutions have more Conduct practices 0.43 influence over, such as bonuses, business practices, corporate Corporate governance 0.41 governance and technology risks. On the other hand, there was a Reliance on third parties 0.34 stronger consensus about risks seen to be outside banks’ control, Criminality 0.30 such as those related to macroeconomic conditions. Sustainability 0.30 Technology risk 0.24 Could this indicate complacency by practitioners – or are they simply better placed to assess the threat of the operating and Emerging markets 0.22 governance risks they face? Perhaps the answer is both: on nine of Quality of risk management 0.21 the ten risks in the table, risk managers came down in between Shadow banking 0.18 bankers and observers.

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Appendix 2

The changing face of risk

Some Banana Skins come and go, some are hardy perennials.

The Top Ten since 1996 show how concerns have changed over nearly 20 years. 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 financial 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. The next two surveys, conducted at a time of great financial turmoil, showed a twin preoccupation with financial dangers (credit, derivatives, liquidity, capital) and the growing backlash against banks as seen in the sharp growth in regulatory and political risk.

The 2014 survey, the first in the post-crisis era, showed a hardening of the view that these external risks were damaging, but also a lower concern with crisis-critical issues such as credit risk, capital adequacy and liquidity (which disappeared from the Top Ten for the first time since the crisis began). But ominous new risks also appeared, in particular technology and criminality as banks discovered their vulnerability to cyber crime and ageing IT systems.

The latest survey confirms these fears. Technology and criminality risk are now in the top five, ranking alongside regulation and political interference as the top threats to the industry. However the dominant finding is the shakiness of confidence in the macro-economic outlook where high debt, interest rate uncertainty and emerging market difficulties threaten the recovery.

36 CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org C S F I / New York CSFI

Banking Banana Skins: The Top Ten since 1996 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 o’-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

2012 2014 2015 1 Macro-economic risk 1 Regulation 1 Macro-economic envt. 2 Credit risk 2 Political interference 2 Criminality 3 Liquidity 3 Macro-economic envt. 3 Regulation 4 Capital availability 4 Technology risk 4 Technology risk 5 Political interference 5 Profitability 5 Political interference 6 Regulation 6 Pricing of risk 6 Quality of risk management 7 Profitability 7 Credit risk 7 Credit risk 8 Derivatives 8 Corporate governance 8 Conduct practices 9 Corporate governance 9 Criminality 9 Pricing of risk 10 Quality of risk management 10 Capital availability 10 Business model

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org 37 RECENT CSFI PUBLICATIONS

121. “Banking Banana Skins 2015: The CSFI survey of bank risk” £25/$45/€35 By David Lascelles and Keyur Patel. December 2015. ISBN 978-0-9926329-8-4. 120. “THE DEATH OF RETIREMENT: A CSFI report on innovations in work-based pensions” £25/$45/€35 By Jane Fuller. July 2015. ISBN 978-0-9926329-9-1. 119. “INSURANCE BANANA SKINS 2015: the CSFI survey of the risks facing insurers” £25/$45/€35 By David Lascelles and Keyur Patel. July 2015. ISBN 978-0-9926329-5-3. 118. “THE CITY AND BREXIT: A CSFI survey of the financial services sector’s views on Britain and the EU” £25/$45/€35 April 2015. ISBN 978-0-9926329-4-6 117. “SETTING STANDARDS: professional bodies and the financial services sector” £25/$45/€35 By Keyur Patel. December 2014. ISBN 978-0-9926329-3-9. 116. “FINANCIAL INNOVATION: good thing, bad thing? The CSFI at 21” Free November 2014. 115. “NEW DIRECTIONS FOR INSURANCE: Implications for financial stability” £25/$45/€35 By Paul Wright. October 2014. ISBN 978-0-9926329-2-2. 114. “MICROFINANCE BANANA SKINS 2014: Facing reality” Free By David Lascelles, Sam Mendelson and Daniel Rozas. July 2014. ISBN 978-0-9926329-1-5. 113. “BANKING BANANA SKINS 2014: inching towards recovery” £25/$45/€35 By David Lascelles and Keyur Patel. May 2014. ISBN 978-0-9926329-0-8. 112. “INSURANCE BANANA SKINS 2013: the CSFI survey of the risks facing insurers” £25/$45/€35 By David Lascelles and Keyur Patel. July 2013. ISBN 978-0-9570895-9-4. 111. “CHINA’S BANKS IN LONDON” £10/$15/€15 By He Ying. July 2013. ISBN 978-0-9570895-8-7. 110. “BATTING FOR THE CITY: DO THE TRADE ASSOCIATIONS GET IT RIGHT? £25/$45/€35 By Keyur Patel. June 2013. ISBN 978-0-9570895-7-0. 109. “INDEpENDENT RESEARCH: because they’re worth it?” £25/$45/€35 By Vince Heaney. November 2012. ISBN 978-0-9570895-6-3. 108. “COmBININg SAFETY, EFFICIENCY AND COmpETITION IN EUROpE’S pOST-TRADE mARKET” £25/$45/€35 By Peter Norman. October 2012. ISBN 978-0-9570895-5-6. 107. “SEEDS OF CHANGE: Emerging sources of non-bank funding for Britain's SMEs” £25/$45/€35 By Andy Davis. July 2012. ISBN 978-0-9570895-3-2. 106. “mICROFINANCE BANANA SKINS 2012: the CSFI survey of microfinance risk” Free By David Lascelles and Sam Mendelson. July 2012. ISBN 978-0-9570895-4-9. 105. “GENERATION Y: the (modern) world of personal finance” £25/$45/€35 By Sophie Robson. July 2012. ISBN 978-0-9570895-2-5. 104. “BANKING BANANA SKINS 2012: the system in peril” £25/$45/€35 By David Lascelles. February 2012. ISBN 978-0-9570895-1-8. 103. “VIEWS ON VICKERS: responses to the ICB report” £19.95/$29.95/€22.95 November 2011. ISBN 978-0-9570895-0-1. 102. “EVOLUTION AND MACRO-pRUDENTIAL REGULATION” £25/$45/€35 By Charles Taylor. October 2011. ISBN 978-0-9563888-9-6. 101. “HAS INDEpENDENT RESEARCH COME OF AGE?” £25/$45/€35 By Vince Heaney. June 2011. ISBN 978-0-9563888-7-2. 100. “INSURANCE BANANA SKINS 2011: the CSFI survey of the risks facing insurers” £25/$45/€35 May 2011. ISBN 978-0-9563888-8-9. 99. “MICROFINANCE BANANA SKINS 2011: the CSFI survey of microfinance risk” £25/$45/€35 February 2011. ISBN 978-0-9563888-6-5. 98. “INCLUDING AFRICA - BEYOND MICROFINANCE” £25/$45/€35 By Mark Napier. February 2011. ISBN 978-0-9563888-5-8. 97. “GETTING BRUSSELS RIGHT: “best practice” for City firms in handling EU institutions” £25/$45/€35 By Malcolm Levitt. December 2010. ISBN 978-0-9563888-4-1. 96. “pRIVATE EqUITY, pUBLIC LOSS?” £25/$45/€35 By Peter Morris. July 2010. ISBN 978-0-9563888-3-4. 95. “SYSTEMIC pOLICY AND FINANCIAL STABILITY: a framework for delivery” £25/$45/€35 By Sir Andrew Large. June 2010. ISBN 978-0-9563888-2-7. 94. “STRUGGLING Up THE LEARNING CURVE: Solvency II and the insurance industry” £25/$45/€35 By Shirley Beglinger. June 2010. ISBN 978-0-9563888-1-0. 93. “INVESTING IN SOCIAL ENTERpRISE: the role of tax incentives” £25/$45/€35 By Vince Heaney. May 2010. ISBN 978-0-9561904-8-2.

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