Banking Banana Skins 2012 - PwC

Banking 

Banana Skins 

2012 The system 

in peril 

CSFI 

Centre for the Study of 

Financial Innovation 

The CSFI 

survey of 

bank risk 

In association with

C S F I / New York CSFI 

The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 

to look at future developments in the international financial field – particularly from the point of 

view of practitioners. Its goals include identifying new areas of business, flagging areas of danger 

and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a 

belief in open markets. 

Trustees 

Minos Zombanakis (Chairman) 

David Lascelles 

Sir David Bell 

Robin Monro-Davies 

Sir Brian Pearse 

Staff 

Director – Andrew Hilton 

Co-Director – Jane Fuller 

Senior Fellow – David Lascelles 

Programme Coordinator – Lisa Moyle 

Governing Council 

Sir Brian Pearse (Chairman) 

Sir David Bell 

Geoffrey Bell 

Rudi Bogni 

Philip Brown 

Peter Cooke 

Bill Dalton 

Sir David Davies 

Abdullah El-Kuwaiz 

Prof Charles Goodhart 

John Heimann 

John Hitchins 

Rene Karsenti 

Henry Kaufman 

Sir Andrew Large 

David Lascelles 

Robin Monro-Davies 

Rick Murray 

John Plender 

David Potter 

Mark Robson 

David Rule 

Sir Brian Williamson 

Sir Malcolm Williamson (designate) 

Peter Wilson-Smith 

Minos Zombanakis 

CSFI publications can be purchased through our website www.csfi.org or by calling the 

Centre on +44 (0) 207 493 0173 

Published by 

Centre for the Study of Financial Innovation (CSFI) 

Email: info@csfi.org 

Web: www.csfi.org 

ISBN: 978-0-9570895-1-8 

Printed in the United Kingdom by Heron, Dawson & Sawyer 

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



NUMBER ONE HUNDRED AND FIVE Banking Banana Skins 2012 

FEBRUARY 2012 

Preface 

One may carp at the predictive power of our Banana Skins surveys. But there is no denying that 

they paint a very powerful picture of what financial insiders (practitioners, regulators, jaundiced 

observers) believe to be the most pressing problems of the day. Two years ago, it was the threat of 

political interference in the business of banking, followed by credit risk (“We lose money the oldfashioned 

way – we lend it”) and, bizarrely, too much regulation. Now, it is: 

- macro-economic risk – defined as a fragile global economy, poised yet again on the 

brink of recession; 

- credit risk; 

- liquidity – notably the difficulty that banks, particularly in Europe, are having funding 

themselves; and 

- the availability, or not, of capital – which pretty much guarantees that banks’ response 

to pressure to boost their own funds (Basel 3 et al) will lead to a shrinking of their 

balance sheets and the exacerbation of the economic downturn we all seek to avoid. 

It is all sad, gloomy – and predictable. As this issue of Banana Skins makes clear, risk in the 

financial system is now at a 13-year high, and anxiety levels are unprecedented. Some of this is 

what we economists call ‘exogenous’, i.e. out of our control. But one of the lessons that this 

survey teaches us, yet again, is the danger of unintended consequences. A few years ago, Basel 3 

probably looked like a good idea. Now, it is clear that it is coming along at precisely the wrong 

time – virtually guaranteeing that big banks will not be able (even if willing) to play the role of 

economic locomotive that politicians demand of them. It is still heretical to say it out loud, but one 

wonders whether the core idea that the best way to regulate banks is through tougher capital ratios 

needs to be fundamentally rethought, i.e. abandoned. 

This year’s Banana Skins survey is, as always, a good read and reflects the considered views of 

people who genuinely run the global financial system. Which (in my view, at least) makes it odd – 

and not a little disturbing – that the risk embodied in payment systems weighs in at No 30, bottom 

of our list. That said, I do think that the references to China are deeply significant: the problems of 

its banks, falling export orders, its over-dependence on the West (an interesting twist) etc. My 

guess is that in the next survey, China will merit a section all to itself. 

In the meantime, my thanks to David Lascelles for putting together what has become the CSFI’s 

signature report – this time, bigger (and better) than ever. Thanks also to our friends at PwC for 

sponsoring it and, as important, for allowing us the editorial freedom to say whatever we like 

about the financial sector that succours us all. I hope that our survey helps the banks avoid some of 

the risks that appear to be gathering on the horizon. At the least, it should make us all question some 

of our most cherished assumptions about how banks are run, what their role in society should 

be, and how (if at all) they should be regulated. 

Andrew Hilton 

Director, CSFI 

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 1


Banking Banana Skins 2012 

Foreword 

Foreword 


Welcome to Banking Banana Skins 2012, a unique survey of the risks facing the industry, which 

has been produced by the CSFI in association with PwC. 

Welcome We’re delighted to Banking to be Banana continuing Skins our 2012, support a unique for this survey initiative. of the The risks Banana facing Skins the industry, reports provide which 

has valuable been insights produced into by the risk CSFI concerns in association at the with top of PwC. the boardroom agenda, and how these change 

over time. Not surprisingly, macro-economic risk heads this latest ranking, but it is worth noting 

We’re that it is delighted seen as bigger to be continuing risk today than our support any of the for top this risks initiative. from past The surveys. Banana Skins reports provide 

valuable insights into the risk concerns at the top of the boardroom agenda, and how these change 

This over time. is the Not third surprisingly, time this survey macro-economic has come risk out heads against this the latest backdrop ranking, of but a crisis it worth for financial noting 

services, that it is seen starting as bigger in May risk 2008 today in the than wake any of the earlier top risks stages from of past the surveys. credit crisis, then again in the 

post-Lehman period, and now with the world facing new uncertainties. While the latest set of risks 

may This have is the the third same time origins this as survey the earlier has come ones, out this against survey the shows backdrop that many of a people crisis view for financial them as 

potentially services, starting more in challenging. May 2008 in The the move wake of from the a earlier banking stages crisis of the to credit a broader crisis, set then of again economic, in the 

regulatory post-Lehman and period, political and risks now presents with the a world new set facing of challenges new uncertainties. to bank While management, the latest especially set of risks as 

banks may have must, the in same many origins cases, respond as the earlier to pressures ones, this outside survey their shows immediate that many control. people view them as 

potentially more challenging. The move from a banking crisis to a broader set of economic, 

The regulatory risks highlighted and political in risks this report presents are a fundamental new set of challenges and long term to bank in nature, management, and include especially the lack as 

of banks growth must, in in many many developed cases, respond economies, to pressures the eurozone outside crisis, their immediate the potential control. for some form of Tobin 

tax, increased costs on banks through additional capital requirements, the lack of confidence in the 

interbank The risks markets, highlighted and in the this list report goes on. are And fundamental the risk is and that long things term get in worse nature, before and include they get the better. lack 

of growth in many developed economies, the eurozone crisis, the potential for some form of Tobin 

While tax, increased it is true costs that on many banks banks through have additional made significant capital changes requirements, to their the organisations lack of confidence and the in way the 

they interbank run markets, their businesses and the list since goes the on. last And crisis, the risk the is fragile that things confidence get worse in before the sector they get is better. further 

underlined by the presence of credit risk, liquidity and capital availability among the top four 

Banana While it Skins is true identified that many by banks this survey. have made It is significant also clear that changes much to work their has organisations still to be and done: the banks way 

remain they run both their unpopular businesses and since under the the last spotlight. crisis, the As fragile ever, confidence there is a richness in the sector of insight is further and 

perceptive underlined comment by the presence threaded of through credit the risk, report, liquidity which and will capital repay availability a careful read. among the top four 

Banana Skins identified by this survey. It is also clear that much work has still to be done: banks 

Risk remain management both unpopular is about and choices under and the we spotlight. hope that As this ever, survey there helps is inform a richness the debate. of insight and 

perceptive comment threaded through the report, which will repay a careful read. 

Andrew Gray 

Risk Partner, management PwC is about choices and we hope that this survey helps inform the debate. 

Andrew Gray 

Partner, PwC 

This report was written by David Lascelles 

Cover by Joe Cummings 

This report was written by David Lascelles 

Cover by Joe Cummings 

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

3



About this survey 

This survey describes the risks currently facing the global banking industry, as seen by a wide 

range of bankers, banking regulators and close observers of the banking scene around the world. 

The survey was carried out in November and December 2011, and received 710 responses from 

individuals in 58 countries. The questionnaire (reproduced in the Appendix) was in three parts. In 

the first, respondents were asked to describe, in their own words, their main concerns about the 

financial system over the next 2-3 years. In the second, they were asked to 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 respondent by type was: 

Observers 

28% 

Regulators 

3% 

Bankers 

69% 

The responses by country were as follows: 

Argentina 11 Gibraltar 1 Poland 6 

Australia 13 Greece 1 Portugal 1 

Austria 6 Guernsey 1 Romania 19 

Bahrain 1 Hong Kong 6 Russia 13 

Belgium 6 India 6 Singapore 8 

Bermuda 1 Indonesia 1 Slovakia 8 

Bosnia & Herz. 1 Isle of Man 5 South Africa 7 

Brazil 2 Italy 7 Spain 1 

Canada 41 Japan 3 Sudan 1 

China 23 Jersey 9 Sweden 20 

Colombia 1 Luxembourg 23 Switzerland 7 

Cyprus 5 Malaysia 12 Thailand 4 

Czech Rep. 10 Mauritius 1 Turkey 38 

Denmark 1 Multinational 11 UAE 6 

Ecuador 1 Namibia 4 Uganda 1 

Finland 8 Netherlands 19 UK 245 

France 1 New Zealand 22 Ukraine 4 

Germany 6 Nigeria 2 USA 41 

Ghana 1 Panama 1 Zambia 2 

Philippines 4 

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 3 

4

C S F I / New York CSFI Banking Banana Skins Skins 2012 2012 

Summary 

The The fragility of of the the 

world economy 

is is the the top top threat 

to to banks 

Concern about 

bank funding is is 

on on the the rise rise again 

This This report report describes the the risk risk outlook 

for for the the banking industry at the at the turn turn of of Banking Banana Skins 

the the year year 2012 2012 – – a a time time of of 

2012 

unprecedented stress stress in in the the financial 

markets. The The findings are are based based on on 

(2010 (2010 ranking ranking brackets) in responses from from more more than than 700 700 1 Macro-economic 1 risk risk (4) (4) 

bankers, regulators and and close close 2 Credit 2 Credit risk risk (2) (2) 

observers of of the the banking scene scene in in 58 58 3 Liquidity 3 (5) (5) 

countries. 

4 Capital 4 availability (6) (6) 

5 Political 5 interference (1) (1) 

In In the the opinion of of these these respondents, 

much much the the greatest threat threat facing facing the the 6 Regulation 6 (3) (3) 

banking industry is is the the fragility of of 7 Profitability 7 (-) (-) 

the the world world economy. If If there there is is a a 8 Derivatives 8 (7) (7) 

return return to to recession, it is it is very very likely likely 9 Corporate 9 governance (12) (12) 

that that banks banks will will suffer suffer severe severe credit credit 10 10 Quality of risk of risk management (8) (8) 

losses, losses, and and that that more more of of them them will will fail fail 11 11 Pricing Pricing of risk of risk (9) (9) 

or have or have to be to be nationalised. 

12 12 Business continuation (21) (21) 

13 13 Back Back office office (24) (24) 

“The “The outlook is is terrible” was was the the 

14 14 Management incentives (16) (16) 

comment from from a director a of of a large a large 

15 15 Change management (28) (28) 

UK UK bank, bank, reflecting a a strength of of 

concern that that was was shared shared in in all all the the 16 16 Hedge Hedge funds funds (19) (19) 

major major regions surveyed: North North 17 17 Interest rates rates (14) (14) 

America, Europe and and the the Asia- Asia- 18 18 High High dependence on on technology (18) (18) 

Pacific, plus plus input input from from Latin Latin 19 19 Currencies (11) (11) 

America. The The Banana Skins Skins Index, Index, a a 20 20 Business practices (22) (22) 

measure of of anxiety levels levels in in the the 21 21 Equity Equity markets (10) (10) 

financial sector, sector, is at is its at its highest since since 

22 22 Emerging markets (17) (17) 

it was it was started started 13 13 years years ago. ago. 

23 23 Rogue Rogue trader trader (20) (20) 

The The main main causes causes are are obvious: the the 

crisis crisis in in the the eurozone and and mounting 

debt debt problems in in many many of of the the 

world’s largest economies (No. (No. 2), 2), 

linked linked to weak to weak banking systems and and a a 

scarcity of of credit. credit. 

24 24 Criminality (27) (27) 

25 25 Sustainability (25) (25) 

26 26 Commodities (13) (13) 

27 27 Fraud Fraud (15) (15) 

28 28 Human resources (-) (-) 

29 29 Reliance on on third third parties parties (-) (-) 

30 30 Payment systems (26) (26) 

Specific banking risks risks lie lie in in the the area area 

of of funding. Concerns about about the the 

adequacy of of liquidity (No. (No. 3) 3) and and capital (No. (No. 4) 4) are are on on the the rise rise again again due due to to the the 

low low level level of of confidence in in (and (and among) banks. banks. The The banking sector’s ability ability to to 

sustain profitability (No. (No. 7) 7) in in a difficult a and and changing environment is is also also in in 

doubt. doubt. 

Complicating the the picture is is the the high high level level of of political interference (No. (No. 5) 5) and and 

regulation (No. (No. 6) 6) in in the the banking industry. Although these these efforts efforts are are intended to to 

bring bring about about a solution a to to the the banking crisis, crisis, bankers say say they they are are also also adding adding cost cost 

and and distraction to the to the business, and and making it harder it harder for for them them to supply to supply credit credit to the to the 

economy. 

5 5 

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


Banking Banana Skins Skins 2012 2012 

Back offices 

are are under 

strain 

Concern about about the the ability ability of banks of banks to manage to the the complexities of modern of banking is is 

also also high: high: weakness in corporate in governance (No. (No. 9) 9) and and risk risk management (No. (No. 

10) 10) are are both both seen seen as Top as Top Ten Ten risks. risks. A fast-rising A risk risk business is continuation (up (up 

from from No. No. 21 21 to No. to No. 12), 12), i.e. i.e. the the ability ability of the of the banking system system to survive to the the failure failure of of 

a major a major financial institution. Similarly, there there is is strong strong concern about about change 

management (up (up from from No. No. 28 28 to No. to No. 15): 15): the the capacity of banks of banks to handle to handle the the huge huge 

agenda agenda of of restructuring which which is being is being imposed on on them them by by new new regulation. Back Back 

office office risk risk (up (up from from No. No. 24 24 to No. to No. 13) 13) has has also also risen risen sharply because of the of the stresses 

on on systems created created by by the the crisis crisis and and the the heavy heavy volume of new of new regulation. 

In the In the banking markets, derivatives (No. (No. 8) continue 8) to be to be seen seen as as high a high risk risk area, area, 

though though activity is is expected to to decline. Hedge Hedge funds funds (No. (No. 16), 16), another earlier earlier 

whipping boy, boy, come come out out as as a middling a risk. risk. By By contrast, market-related risks risks are are 

seen seen to to be be relatively moderate: little little potentially damaging movement is seen is seen in in 

currencies, despite despite the the euro, euro, (No.19), interest rates rates (No. (No. 17), 17), and and equity equity markets 

(No. (No. 21) 21) because banks banks have have the the means means to protect to protect themselves against against volatility. 

Big Big movers 

RISING RISKS RISKS 

Macro-economic risk: risk: worries about about a new a new global global recession 

Liquidity: resurgent fears fears of a of liquidity a crunch crunch 

Capital availability: risks risks of a of shortage a Corporate governance: ability ability to manage to risk risk 

Business continuation: inadequacy of crisis of crisis recovery plans plans 

Back Back office: office: systems could could be be overwhelmed 

FALLING RISKS RISKS 

Interest rates: rates: little little volatility foreseen 

Emerging markets: in better in better shape shape than than developed markets 

Payment systems: standing up up well well to the to the stresses 

Despite the the strength of anti-bank of feeling feeling generated by by the the crisis, crisis, reputational issues issues 

and and wider wider questions about about the the social social sustainability of banks of banks come come low low down down the the list list 

(No. (No. 25). 25). The The risks risks associated with with management incentives are are only only seen seen as as 

middling (No. (No. 14), 14), with with banking respondents describing concerns as as “wildly 

exaggerated”. Although the the need need for for banks banks to rebuild to rebuild trust trust is widely is widely recognised, the the 

risks risks to bank to bank survival in this in this area area are seen seen to be to be low. low. The The risk risk that that the the low low reputation 

of of banks banks will will drive drive away away talented human resources is is also also low low (No. (No. 28). 28). 

Criminality risks risks (fraud, (fraud, data data theft, theft, rogue rogue traders, cyber cyber attack) attack) are are seen seen as as 

manageable, though though they they may may rise rise in difficult in economic conditions. 

Emerging market 

risks are are among 

the the few few that that are are 

falling 

Certain operational risks risks such such as as reliance on on third third parties (i.e. (i.e. offshoring) and and 

payment systems come come at the at the bottom bottom of the of the list. list. Although always always a potential a source source 

of trouble, of the the prevailing view view is that is that these these have have stood stood up up well well in the in the crisis. crisis. 

The The risks risks in emerging markets are are seen seen to be to be falling falling (down (down from from No. No. 17 17 to No. to No. 22) 22) 

mainly mainly because the the sector sector is seen is seen to to be be in in better better shape shape than than industrial countries 

(though there there are are worries about about China). Emerging markets do, do, however, have have 

concerns of their of their own own about about global global economic prospects, and, and, for for the the first first time time in this in this 

survey, survey, we we include a view a view of the of the world world from from their their perspective. 

A A breakdown of of responses by by type type shows shows a high a high level level of of agreement among among 

bankers, non-bankers and and regulators about about the the risks risks facing facing banks: banks: all all three three put put the the 

6 6 




macro-economic situation, credit credit risk risk and and liquidity liquidity risk risk in their in their top top three. three. The The 

availability of capital, of capital, the the volatility volatility of derivative of markets markets and and the the outlook outlook for 

for 

banking banking profitability are are also also common common top top level level concerns. The The big big difference 

between between them them is the is the perception of regulatory of and and political political risk: risk: the the bankers bankers rate rate this 

this 

very very high, high, while while non-bankers put put it at it the at the middle middle and and regulators at the at the bottom bottom of 

of 

their their lists. lists. 

The The risks risks 

are are global 

Geographically, , concerns , concerns are are also also strikingly similar similar in the in the main main regions regions surveyed. 

All All of them of them view view the the macro-economy, credit credit and and liquidity liquidity as major as major risks. risks. Concern Concern 

about about regulatory risk risk strongest is strongest in North in North America America followed followed by Asia by Asia Pacific Pacific and 

and 

Europe. Europe. There There is also is also little little to distinguish to the the types types of risk of risk identified by industrial by and and 

emerging countries, underlining the the global global nature nature of the of the dangers dangers currently currently facing facing 

banks, banks, though though emerging markets markets are are more more confident ident than than industrial countries countries about 

about 

their their economic prospects. 

Preparedness. We We asked asked respondents how how well well prepared prepared they they thought thought the the banking banking 

industry industry was was to handle to handle the the risks risks they they had had identified. On On a scale a scale of 1 of (poorly) 1 (poorly) to 5 to 5 

(well) (well) they they gave gave a score a score of 2.96, of 2.96, slightly slightly above above middling, the the broad broad message message being 

being 

that that “banks “banks are are trying trying but but could could do better”. do better”. 

5 

Banana Skins Index 

Score 

4.5 

4 

3.5 

Poor 

risk mgt 

Equity 

mkts 

Credit 

risk 

Derivatives 

Too much 

regulation 

Liquidity 

Political 

interference 

Macro-economic 

risk 

The The Banana Skins 

Index is is at at an an 

all-time high high 

3 

2.5 

2 

1998 

2000 

2002 

2004 

2006 

2008 

2010 

Top risk 

Avg.of all risks 


The The Banana Banana Skins Skins Index Index tracks tracks survey survey responses over over time time and and can can be read be read as an as an 

indicator indicator of changing of anxiety anxiety levels. levels. The The upper upper line line shows shows the the average average score score (out (out of of 

5) given 5) given to the to the top top risk, risk, and and the the bottom bottom line line shows shows the the average average of all of the all the risks. risks. This 

This 

year, year, both both indicators are are at record at record highs, highs, a clear a clear sign sign of the of the unprecedented level level of 

of 

anxiety anxiety in the in the market. market. 

7 7 



Banking Banking Banana Banana Skins Skins 2012 2012 

Who said what 

A breakdown A breakdown of the of Top the Ten Top responses Ten responses by type by type shows shows different different levels levels of concern. of concern. 

Bankers, 

observers and and 

regulators agree agree 

on on the the big big risks, risks, 

but but differ differ on on the the 

detail detail 

Bankers Bankers – commercial – and and investment bankers bankers 

1 Macro-economic 1 risk risk The The bankers’ bankers’ chief chief concerns concerns centre centre on the on the 

2 Liquidity 2 Liquidity 

operating operating environment: the state the state of the of global the global 

economy, economy, rising rising debt, debt, particularly particularly on the on the 

3 Credit 3 Credit risk risk 

sovereign sovereign front, front, and the and possibility the possibility of a of new a new 

4 Capital 4 Capital availability availability 

liquidity liquidity crunch. crunch. The The availability availability of capital of capital 

5 

6 

Regulation 5 Regulation 

Profitability 

6 Profitability 

and profit and profit prospects prospects are also are also high high on the on list. the list. 

The The bankers’ bankers’ response response is especially is especially notable notable 

7 Political 7 Political interference 

for its for concern its concern with with the negative the negative impact impact of of 

regulation, regulation, and growing and growing political political interference 

8 Derivatives 

8 Derivatives 

in the in business. the business. But they But they also also recognise recognise the the 

9 Corporate 9 Corporate governance governance need need for for stronger stronger governance governance and and risk risk 

10 10 Quality Quality of risk of management 

risk management. 

Observers – non-bankers, – analysts, analysts, consultants, academics 

1 Credit 1 Credit risk risk Observers Observers of the of banking the banking industry industry are the are the 

2 Macro-economic 2 risk risk only only group group which which puts puts credit credit risk at risk the at top the of top of 

the list, the list, believing believing that that banks banks are acutely are acutely 


vulnerable vulnerable to the to sovereign the sovereign debt, debt, housing housing and and 

4 Derivatives 

4 Derivatives 

consumer consumer loan loan markets. markets. They They also also share share 

5 

6 

Capital 5 Capital availability availability 

Political 6 Political interference 

bankers’ bankers’ concerns concerns with with funding funding issues. issues. But But 

they they are more are more worried worried than than bankers bankers about about 

potential potential losses losses from from derivative derivative products products and and 

7 Quality 7 Quality of risk of management 

risk the mispricing the mispricing of risk. of risk. While While they they also also see see 

8 Corporate 8 Corporate governance governance 

political political interference as a as risk, a risk, they they do not do not 

9 

10 

Profitability 


10 Pricing Pricing of risk of risk 

share share bankers’ bankers’ intense intense concern concern about about 

excessive excessive regulation. regulation. 

Regulators – supervisors, – government officials officials 

1 Macro-economic 1 risk risk The The regulators’ regulators’ top top three three concerns concerns are are 


identical identical to the to bankers’, the bankers’, showing showing a strong a strong 

alignment alignment of views of views on the on near-term the near-term risk risk 


outlook. outlook. They They are also are also concerned concerned about about the the 

4 Business 4 Business continuation 

operating operating strength strength of of banks: banks: capital, capital, 

5 

6 


Profitability 


profitability and and back back office office management. 

But But high high on their on their list list the is institutional the 7 Corporate 7 Corporate governance governance strength strength of banks, of banks, and and their their plans plans for for 

business business continuation (crisis (crisis recovery). recovery). 


risk Regulators Regulators also also show show more more concern concern than than 

9 

10 

Derivatives 

9 Derivatives 

10 Emerging Emerging markets markets 

other other groups groups about about the economic the economic outlook outlook for for 

emerging emerging markets. markets. 

8 8 




North North America 

1 Macro-economic 1 risk risk The The top concern top concern in the in US the and US Canada and Canada is the is the 

2 Regulation 

2 Regulation 

state state of the of world the world economy, economy, in particular in particular the the 

risk risk of contagion of contagion from from the the eurozone eurozone debt debt 


crisis. crisis. But But the the response response is notable is notable for the for the 


intense intense focus focus on the on the negative negative impact impact of of 

5 

6 

Credit 5 Credit risk risk 

Derivatives 

6 regulation regulation and and growing growing political political interference 

in the in the banking banking business. business. Although Although this this is 


7 largely largely a US a preoccupation, US it is it also is also present present 

in Canada. in Canada. Credit Credit risk risk a is generally a generally lower lower 


concern, concern, with with both both economies economies feeling feeling that that 


risk they they may may be past be past the worst the worst on domestic on domestic bad bad 

10 10 Pricing Pricing of risk of risk 

debts. debts. 

Risks Risks are are 

remarkably similar 

across across the the regions 

Europe Europe 

1 Macro-economic 1 risk risk Concern Concern about about the the sovereign sovereign debt debt crisis crisis 


dominates dominates the responses the responses from from Europe, Europe, both both 

as to as its to scale its scale and and poor poor handling. handling. Fears Fears of a of a 


renewed renewed recession recession are are strong, strong, with with bank bank 


funding funding a big a big issue issue in several in several countries, countries, 

5 

6 

Profitability 


particularly those those at the at the eye eye of the of the debt debt 

storm. storm. Europeans Europeans share share North North American American 

concerns concerns about about the growth the growth of regulation of regulation and and 

7 Regulation 

7 Regulation 

political political interference in banking, banking, though though not not 

8 Derivatives 

8 as intensely. as intensely. This This the is only the only geographical 

9 Corporate 9 Corporate governance 

group group which which sees sees the the quality quality of corporate of corporate 


risk governance as a as Top a Top Ten Ten issue. issue. 

Asia Asia Pacific Pacific 

1 Macro-economic 1 risk risk The The Asia Asia Pacific Pacific response response covers covers a wide a wide 


variety variety of of economies, including including Japan, Japan, 

China, China, Malaysia Malaysia and and Australia, Australia, and and therefore therefore 


displays displays less less obvious obvious patterns. patterns. However However 

4 Regulation 

4 Regulation 

concern concern about about the the economic economic outlook outlook is is 

5 

6 



strong, strong, particularly the risk the risk of contagion of contagion from from 

the eurozone the eurozone crisis. crisis. There There are also are also worries worries 

about about the prospects the prospects for the for region the region if China if China 


7 slows slows down. down. The The growth growth of of banking banking 


risk regulation regulation and and political political interference is a is a 

9 

10 

High 9 High dep. dep. on technology on 10 Derivatives 

concern concern in many in many countries, countries, as is as the is the high high 

technological dependence of banks. of banks. 

9 

9 




Countries at at 

different levels levels of of 

development 

share share the the same same 

risk risk outlook 

Industrial countries 

1 Macro-economic 1 risk risk There There is little is little surprise surprise in the in the industrial industrial 


countries’ countries’ top worries: top worries: the state the state of the of global the global 

economy economy and the and risk the of risk a major of a major credit credit crisis. crisis. 


Concern Concern about about funding funding issues issues and and 

4 Regulation 4 Regulation 

profitability is also is also strong. strong. Bankers Bankers in all in the all the 

5 

6 



countries countries in this in group this group are concerned are concerned about about 

the strong the strong growth growth of regulation, of regulation, believing believing 



that that it is it adding is adding unnecessary cost cost and and 

distraction, distraction, and and holding holding back back growth. growth. 

8 Derivatives 

8 Derivatives 

However However they they also also recognise recognise that the that quality the quality 

9 Corporate 9 Corporate governance governance of their of their risk risk management and and governance governance 


risk needs needs attention. attention. 

Emerging economies 

1 Macro-economic 1 risk risk Although Although the the emerging emerging economies economies are are 


broadly broadly in a in stronger a stronger position position than than the the 

industrial industrial countries, countries, their their concern concern about about the the 


debt debt problems problems of the of developed the developed world world is is 


intense. intense. The The risk risk of a of collapse a collapse in global in global 


risk demand demand of and a parallel of a parallel crisis crisis in the in banking the banking 



markets markets is currently is currently their their greatest greatest worry; worry; 

7 Corporate 7 Corporate governance governance none none of them, of them, even even China, China, would would be be 

insulated insulated from from the shocks. the shocks. Banks Banks in this in this 


group group are also are also concerned concerned about about the strength the strength 

9 

10 

Pricing 9 Pricing of risk of risk 

10 Derivatives Derivatives 

of their of their management, with with the growth the growth of of 

political political interference a new a new worry. worry. 

10 

10 



Preparedness 

We We asked asked respondents how how well well prepared prepared they they thought thought banks banks were were to handle to handle the the 

risks risks that that lie ahead, lie ahead, on a on scale a scale where where 5=well 5=well prepared prepared and and 1=poorly prepared. The The 

average average score score of more of more than than 700 700 responses was was 2.96, 2.96, which which is slightly is slightly better better than than 

middling. 

However the the result result was was strongly strongly weighted by bankers by bankers who who had had a higher a higher opinion opinion of of 

their their preparedness than than their their observers and and regulators (though (though regulators were were 

slightly slightly more more positive positive than than observers). 

Bankers Bankers 3.13 3.13 

Regulators 2.92 2.92 

Observers 2.62 2.62 

Total Total 2.96 2.96 

On On the the positive positive side, side, many many respondents said said that that banks banks had had put put a lot a of lot work of work into into 

risk risk management, and and were were better better prepared prepared for for what what were were likely likely to be to very be very difficult difficult 

conditions over over the the next next few few years. years. For For example, example, the the executive vice-president of risk of risk 

services services at a at large a large Canadian bank bank said said that that “banks “banks have have lived lived through through and and survived survived 

the the recent recent recession, so are so are well well prepared prepared to handle to handle risks. risks. The The recent recent recession has has 

also also increased the the profile profile risk of risk management, in turn, in turn, increasing oversight/risk 

mitigation”. 

The The risks risks lie lie in in 

the the ‘unknown 

unknowns’ 

A bank A bank economist in the in the UK UK put put in a in special a special plea: plea: “The “The trouble trouble is that is that there there is a is a 

wide wide disparity disparity between between the the capabilities of different of different banks. banks. Increasingly banks banks and and 

bankers bankers are are referred referred to as to homogenous as groupings; there there is very is very little little recognition of of 

how how well well some some banks banks have have performed despite despite the the turbulence”. 

Many Many respondents were were also also sympathetic to the to the fact fact that that present present conditions are are 

unprecedented, and and that that banks banks are are snowed snowed under under with with risks, risks, many many of them of them outside outside 

their their control: control: the the state state of the of the global global economy, the the possible possible collapse collapse of the of the eurozone, 

and and heavy heavy political political interference. As As one one consultant said: said: “The “The risks risks lie lie in the in the 

unknown unknowns”. 

But But many many respondents felt felt that that the the banks banks had had been been slow slow to respond to respond to their to their 

difficulties, be be it for it for reasons reasons of complacency, of incompetence, or the or the view view that that 

prudence stood stood in the in the way way of profits. profits. They They therefore therefore remained vulnerable to shocks. to shocks. 

One One respondent said said that that having having abandoned the the culture culture of prudence of during during the the good good 

times, times, banks banks were were now now “re-rigging at sea” at sea” which which was was “not “not an easy an easy exercise, exercise, and and 

surely surely not not necessarily an effective an effective one”. one”. 

11 11 




1. 1. Macro-economic risk risk (4) (4) 

The The fragility fragility of the of the world world economy with with the the possibility of a of return a return to recession to poses poses 

the the greatest greatest risk risk to the to the banking banking industry industry these in these turbulent times, times, according to this to this 

poll poll of bankers of bankers and and close close observers of the of the banking banking scene scene in 58 in countries. 58 No No surprise surprise in this in this finding, finding, perhaps. perhaps. But But the the picture picture painted painted by by this this survey survey is is 

unquestionably the the bleakest bleakest we we have have seen seen in more in more than than 15 years 15 years of Banking of Banking Banana Banana 

Skins Skins reports, reports, with with huge huge uncertainty over over the the near-term prospects, but but also also the the 

certainty that that wrenching changes changes will will be needed be needed to restore restore stability stability and and growth growth in in 

the the longer longer term. term. “The “The outlook outlook is terrible” is terrible” was was the the blunt blunt comment from from a UK a UK bank bank 

director, director, words words which which reflected a level a level of concern of concern that that was was shared shared in most in most parts parts of of 

the the world. world. 

The The main main causes causes are are obvious: obvious: crisis crisis in the in the eurozone and and mounting debt debt problems in in 

many many of the of the world’s world’s largest largest economies, linked linked to low to low banking banking confidence and and a a 

scarcity scarcity of credit. of credit. A period A period of financial of disruption could could severely severely damage damage the the global global 

economy, and and smother smother the prospect prospect of growth of growth for for many many years. years. Another Another banker banker said said 

that that “European recession seems seems certain, certain, US US recession likely likely and and a significant a slowing slowing of growth of growth in Asia in Asia and and Brazil Brazil is also is also likely”. likely”. 

A new A new global 

recession ‘could 

cause more 

bank bank failures’ 

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

CSFI, CSFI, said: said: “The “The biggest biggest risk risk of all of is all that is that it will it will not not prove prove possible possible to bring to bring about about an an 

orderly orderly reduction of borrowing of by by nations, nations, banks banks and and commercial and and individual 

customers resulting in a in major a major recession”. The The head head of stress of stress testing testing at a at large a large Swiss Swiss 

bank, bank, said said his his two two main main concerns were: were: “Firstly “Firstly that that the the eurozone shatters shatters and, and, 

conversely, that that due due to massive to massive printing printing of money, of money, inflation inflation rises rises to well to well above above 

comfortable levels.” levels.” 

The The impact impact on banks on banks would would be severe. be severe. Despite Despite all the all the measures that that have have been been taken taken 

to bolster to bolster banking banking systems, systems, the the fear fear is that is that there there will will be considerable be retrenchment in in 

the the sector, sector, and and possibly possibly failures failures that that financially stressed stressed governments will will find find it it 

hard hard to prevent. to prevent. 

With With financial markets markets tightly tightly linked, linked, any any local local crisis crisis would would spread spread quickly quickly through through 

the the global global banking banking system, system, affecting even even countries which which have have so far so far been been in good in good 

economic health. health. City City of London of London economist Andrew Andrew Smithers said said that that “excess “excess debt debt 

means means that that defaults defaults are are likely likely to be to well be well above above historic historic levels levels in the in the years years ahead, ahead, and and 

this this will will be exacerbated be by slow by slow growth growth and and even even more more by recession”. by All All the the major major regions regions in this in this survey survey showed showed a high a high level level of concern of concern with with the the growing growing 

financial strains. strains. The The chairman of the of the risk risk committee of a of large a large Canadian bank bank said said 

that that “progress on fundamental on imbalances has has been been not not enough enough and and too too slow”, slow”, and and 

Gary Gary Dingley, chief chief operational risk risk officer officer at the at the Commonwealth Bank Bank of of 

Australia, said said that that “from “from my my own own institution’s perspective, the the outlook outlook for for the the next next 

2-3 2-3 years years will will be challenging be due due to the to the external external environment”. The The head head of country of country 

risk risk of a of bank a bank in Brazil in Brazil said said his his top top concern concern was was the the ability ability of banks of banks “to “to cover cover losses losses 

if the if the European sovereign crisis crisis spreads spreads or results or results in a in new a new financial crisis”. crisis”. 

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C S F I / New York CSFI Banking Banking Banana Banana Skins Skins 2012 2012 

China: China: handle handle with with care care 

China’s China’s prospects prospects were were central central to respondents’ to assessments of many of many of the of the 

key risks key risks in this in this survey: survey: the global the global economic economic outlook, outlook, the stability the stability of financial of financial 

markets, markets, the resolution the resolution of sovereign of sovereign debt debt problems, problems, and and the safety the safety of the of the 

banking banking system. system. Providing, Providing, as it as does, it does, a counterbalance a to the to West’s the West’s 

economic economic weakness weakness and and fiscal fiscal deficits, deficits, China China could could have have a devastating a effect effect if if 

it started it started to go to wrong. go wrong. 

The The overall overall tone tone of comment of comment about about China China was was cautious, cautious, even even sceptical. sceptical. Many Many 

respondents noted noted that that economic economic growth growth was was slowing, slowing, and and that that China China was was 

building building up internal up internal strains strains which which could could lead lead to political to political and and economic economic 

turbulence. One One of them of them said: said: “China “China is slowing is slowing and and very very few banks few banks are really are really 

prepared prepared for this; for this; their their business business plans plans all call for call big for expansion big expansion in Asia”. in Asia”. 

A particular A particular worry worry is China’s is China’s banking banking system system which which is seen is seen to be to be 

undercapitalised and and threatened by inflated by inflated asset asset prices. prices. It also It also has a has a 

“shadow” “shadow” banking banking system system which which is poorly is poorly understood. The The head head of treasury of treasury at at 

one one of China’s of China’s largest largest banks banks said said that that the finance the finance industry industry faced faced risks risks from from 

many many directions. directions. “The “The pace pace of profit profit growth growth will slow will slow down, down, and and it is it worth is worth 

noting noting that that the banking the banking industry industry will increasingly will encounter encounter risks risks in liquidity in liquidity 

which which result result from from credit-related risks. risks. Nonetheless, the overall the overall risks risks are are 

relatively relatively manageable in our in view”. our view”. 

Giles Giles Chance, Chance, professor professor at the at Guanghua the Guanghua School School of Management of at Peking at Peking 

University, University, said said the government the needed needed to liberalise to liberalise the banking the banking system system to to 

increase increase transparency and and confidence. “But “But it's not it's clear not clear that that China China will go will go 

down down this this route route any time any time soon soon because because it will it undermine will undermine the CCP's the CCP's control control of of 

China China which which it exercises it exercises through through the large the large banks banks and and state-owned 

enterprises”. 

In South In South Africa, Africa, the chief the chief risk risk officer officer a of large a large South South African African bank bank commented: 

“My “My principal principal concern concern centres centres on the on stability the stability of the of European the European banking banking system system and and 

the systemic the systemic risk risk that that could could ensue ensue if one if of one the of banks the banks exposed exposed to euro to euro sovereign sovereign debt debt 

actually actually fails. fails. Moreover, Moreover, this risk this risk prevalent is prevalent at a at time a time when when sovereigns sovereigns themselves 

will will find find it difficult it difficult to support to support the banking the banking sector sector and and when when banks' banks' access access to new to new 

capital capital and term and term liquidity liquidity is restricted is restricted and/or and/or prohibitively expensive.” 

2. 2. Credit risk risk (2) (2) 

Can Can the the global global 

banking system 

absorb all all the the 

likely likely losses? 

The The concerns concerns of respondents of about about credit credit risk risk focused focused less less on the on likelihood the likelihood of loss, of loss, 

which which most most of them of them took took as read, as read, than than on the on scale the scale of likely of likely losses, losses, and their and their impact. impact. 

How How big will big will they they be, and be, and will will the system the system be able be able to absorb to absorb them? them? The The head head of of 

prudential prudential policy policy at a at large a large UK UK bank bank said: said: “[Loss “[Loss is] a is] certainty. a certainty. More More relevant relevant is is 

whether whether this can this be can covered be covered by existing by existing capital”. capital”. The The fear fear among among many many respondents 

was was that that the answer the answer is “no”, is “no”, the obvious the obvious consequence being being the likelihood the likelihood of bank of bank 

failures failures and/or and/or nationalisations. “The “The risk risk of financial of financial institutions defaulting defaulting has has 

increased increased drastically”, said said the head the head of credit of credit control control at a large at a large Scandinavian bank. bank. 

As might As might be expected, be expected, by far by the far biggest the biggest concern concern is sovereign is sovereign debt, debt, both both in the in the 

industrialised world world and and emerging emerging countries. countries. One One respondent foresaw foresaw “a sovereign “a sovereign 

default default domino. domino. Most Most developed developed nations nations are are insolvent, insolvent, and and it's only it's only collective collective 

disbelief disbelief in the in markets the markets that that keeps keeps them them from from dumping dumping sovereign sovereign debt debt en masse”. en masse”. 

Top Top of the of list the list the is eurozone, the eurozone, both both for the for scale the scale of the of risk the risk and the and hesitancy the hesitancy of the of the 

political political response. response. Although Although the banks the banks most most immediately under under threat threat are European, are European, 

13 13 




the the effects effects could could be global. be global. A European A financial regulator saw saw “a spillover “a of the of the 

eurozone sovereign crisis crisis into into a full a full blown blown banking banking crisis crisis driving driving an unsustainable 

an rise rise in funding funding costs costs and and the the possible possible freezing freezing of the of the banking banking system”. The The director director 

of regulatory of affairs affairs at a at large a large UK UK bank bank saw saw “the “the potential for for a vicious a vicious circle circle of of 

contagion from from impaired sovereigns to the to the financial sector sector back back to sovereigns to that that 

might might not not otherwise be credit-impaired be – and – and the the impact impact of this of this on macroeconomic 

on performance”. 

Other Other potential sources sources of credit of credit risk risk include include housing housing finance. finance. A senior A senior regulator’s 

top top concerns included included “debt “debt deflation, leading leading to falling to falling property property values values in Europe, in Europe, 

the the US US and and China China against against which which banks banks have have large large residential and and commercial 

mortgage exposures”. 

Consumer debt debt is a is growing a growing concern, concern, and and not not just just in the in the advanced economies. A A 

banker banker in Turkey in Turkey said said that that “credit “credit card card and and consumer loan loan exposure, which which is is 

growing growing worldwide, especially in the in the developing and and emerging markets, markets, should should be be 

given given greater greater attention”. China China is also is also a worry. a worry. A bank A bank auditor auditor there there was was concerned 

about about “the “the deteriorating credit credit environment amidst amidst the the slowdown/recession of the of the 

world world economy (e.g. (e.g. US US slowdown, Eurozone debt debt and and the the property property bubble bubble in Asia) in Asia) 

which which will will create create threats threats to the to the credit credit quality quality of financial of institutions”. 

The The level level of anxiety of anxiety was was somewhat lower lower in North in North America, partly partly reflecting the the 

generally healthier state state of the of the Canadian economy, but but also also a sense a sense in the in the American 

banking banking community that that they they may may be be past past the the worst. worst. However regulators there there 

expressed concern concern about about the the high high levels levels of consumer of and and housing housing debt, debt, with with a US a US 

official official predicting that that “mortgage write-downs, write-offs, and and short short sales sales will will 

continue continue to plague to plague the the banking banking sector sector for for the the next next 2-3 2-3 years, years, and and remain remain a drag a drag on on 

the the economy”. 

3. 3. Liquidity (5) (5) 

Concerns about about liquidity liquidity are are on the on the rise rise again. again. They They topped topped the the Banana Banana Skins Skins poll poll in in 

2008 2008 and and eased eased off off to 5to th place 5 th place in 2010 in 2010 as the as the financial crisis crisis appeared to recede. to recede. But But 

now now people people are are worried worried about about a re-run a re-run of 2008, of 2008, with with the the banks’ banks’ funding funding markets markets 

seizing seizing up once up once more more and and causing causing havoc. havoc. 

Concerns about 

liquidity are are on on 

the the rise rise again 

As As respondents pointed pointed out, out, a liquidity a liquidity crisis crisis not is not a threat a threat but but a fact a fact for for many many 

banks, banks, notably notably in the in the eurozone, which which can can no longer no longer fund fund themselves in the in the markets, markets, 

and and have have been been forced forced to turn to turn to their to their central central banks. banks. The The question, really, really, is how is how 

much much worse worse this this likely is likely to get, to get, and and what what impact impact it will it will have. have. 

John John Hitchins, banking banking partner partner at PwC, at PwC, said said that that “in “in the the short short term term the the biggest biggest threat threat 

to the to the banking banking system system is the is the impact impact on on wholesale funding funding markets markets of a of failure a failure to to 

solve solve the the Eurozone crisis, crisis, and and a disorderly a default default by one by one or more more countries. This This 

could could cause cause a funding a funding freeze freeze worse worse than than 2008”. 2008”. 

Some Some respondents said said that that the the risk risk was was being being made made worse worse by the by the tougher tougher liquidity liquidity 

standards now now being being imposed imposed by regulators. by These These are are creating creating a shortage a shortage of suitable of suitable 

assets, assets, and and even even encouraging greater greater risk-taking by by banks. banks. The The chief chief financial 

officer officer a of large a large South South East East Asian Asian bank bank said said that that “liquidity risk risk management is a is a 

key key concern. concern. As As financial institutions are are pressured to reduce to reduce their their risk-weighted 

assets, assets, they they will will be forced be forced to take to take more more interest interest rate rate risk risk and and funding funding risk risk to increase to increase 

returns returns on their on their capital”. capital”. James James Prichard, a swaps a swaps specialist at Crédit at Crédit Agricole CIB, CIB, 

14 14 



said said that that banks banks could could find find themselves in a in liquidity a liquidity trap trap “competing for for deposits deposits to to 

stay stay in existence, in but but then then struggling to find to find opportunities to lend to lend or invest”. or invest”. 

Although liquidity liquidity risk risk has has its roots its roots in the in the euro euro crisis crisis and and the the fear fear of collapsing of banks, banks, its repercussions its could could be far-reaching. be Respondents from from all major all major banking banking 

regions regions mentioned the the danger danger of contagion. of The The head head of market of market funding funding at a at New a New 

Zealand Zealand bank bank said said there there was was “massive concern concern about about the the true true position position of many of many 

banks, banks, especially those those with with exposure exposure to European to sovereign debt. debt. Another Another liquidity liquidity 

squeeze squeeze seems seems inevitable unless unless this this problem problem is addressed is with with proper proper mark-tomarkemarket 

valuation followed followed by recapitalisation by of those of those that that require require it”. it”. 

mark-to- 

But But though though fears fears of a of liquidity a liquidity crunch crunch are are widespread, many many individual banks banks said said 

they they were were currently in a in good a good liquidity liquidity position, position, and and a US a US regulator regulator commented that that 

the the risk risk was was “low “low in the in the US US with with liquidity liquidity nearing nearing 20 year 20 year highs, highs, but but high high in Europe in Europe 

and and potentially elsewhere.” Professor Charles Charles Goodhart of the of the London London School School of of 

Economics agreed agreed that that “the “the risks risks are are quite quite high, high, but but central central banks banks are are on the on the case”. case”. 

4. 4. Capital availability (6) (6) 

The The availability of of 

capital at at the the right right 

price price is is becoming 

an an issue issue 

With With banks banks under under pressure pressure from from regulators to strengthen to their their balance balance sheets, sheets, the the 

availability of capital of capital at the at the right right price price is becoming is a key a key issue, issue, even even a matter a matter of of 

survival survival for some for some banks, banks, though though this this a risk a risk with with strong strong geographical variations. It It 

was was clear clear from from the the responses that that the the greatest greatest problems lie in lie Europe in Europe where where many many 

banks banks have have already already been been effectively shut shut out out of the of the funding funding markets. markets. 

Capital-raising will will be difficult: be difficult: competition for for funding funding is strong, is strong, and and the the banking banking 

sector sector is not is not in favour. in favour. A UK A UK institutional fund fund manager manager asked: asked: “If banks “If banks can't can't make make 

good good profits, profits, why why would would investors investors want want to assign to assign capital capital to the to the sector? sector? Even Even where where it it 

is available, is there there is a is question a question of price”. of price”. A banking A banking consultant said: said: “Capital “Capital will will 

always always be be available available for for important essential essential organisations such such as banks. as banks. The The 

question question rests rests on ‘affordability’. on I think I think banks banks and and investors investors will will need need to revise to revise 

expectations on returns. on returns. This This an is essential an essential part part of the of the changes changes required required to make to make the the 

industry industry safer safer and and more more appropriate to retail to retail deposit deposit taking”. taking”. 

Banks Banks that that cannot cannot raise raise capital capital will will have have to to reduce reduce assets assets (“deleverage”), 

consolidate, or turn or turn to public to public funding. funding. But But all of all these of these routes routes have have their their risks, risks, both both 

for for the the banks banks themselves and and the the wider wider economy. James James Ferguson, head head of strategy of strategy 

at Arbuthnot at Banking Banking Group, Group, warned warned that, that, in trying trying to shrink to shrink their their balance balance sheets, sheets, 

banks banks will will only only be able be able to shed to shed “good “good quality quality assets assets because because they they don’t don’t have have the the 

latitude latitude with with their their capital capital to shift to shift the the poor poor quality, quality, illiquid illiquid ones. ones. The The quality quality of of 

banks’ banks’ remaining assets assets deteriorates and and the the workout workout gets gets extended extended some some years years into into 

the the future”. future”. Another Another unintended consequence could could be that be that banks banks feel feel compelled to to 

take take on more on more risk risk to compensate to for lost for lost revenue. revenue. 

Asset Asset reduction, as many as many respondents pointed pointed out, out, is politically is unpopular at a at time a time 

of economic of recession, which which adds adds to the to the conflicting pressures on on the the banking banking 

industry. industry. The The CEO CEO of a of UK a UK bank bank said: said: “There “There is a is real real mixing mixing of messages of between between 

government pressure pressure to lend to lend and and regulators' pressure pressure to build to build up capital up capital buffers”. buffers”. 

Consolidation, particularly under under duress, duress, can can be disruptive, be and and the the availability of of 

public public funding funding has has shrunk shrunk drastically. 

But But other other respondents were were more more sanguine. The The more more hard-nosed said said that that a tougher a tougher 

capital capital market market would would impose impose a healthy a healthy discipline on banks, on banks, and and force force them them to think to think 

more more carefully carefully about about how how they they manage manage their their resources. Some Some felt felt the the situation situation was was 

15 15 




US US banks are seen 

to to be be better 

capitalised than 

the Europeans 

better than than it it looked. Andrew Cornford, counsellor at at the the Observatoire de de la la Finance 

in in Switzerland, said said that that “the “the problem is is probably overrated, particularly in in view view of of 

the the transition periods to to apply the the new new financial regulatory architecture.” 

The The picture also also varies from from one one region to to another. There was was less less concern in in North 

America and and in emerging markets which have have a lower a dependence on on international 

funding sources. Respondents from from countries like like Australia and and Canada also also 

reported that that funding conditions were were good, and and in in the the US US a banking a regulator said said 

the the situation there there was was improving: “US “US institutions have have already recapitalized and and 

are are currently near near 20-year highs in in liquidity.” 

5. 5. Political interference (1) 

Concern about the the growth of of political interference in in the the banking industry has has come 

down from from the the top top position it it occupied in in the the last last survey – – but but only only because it it is is no no 

longer a threat a but but a reality. a Intrusion by by politicians and and governments in in banking is is 

now now a fact a fact of of life, life, be be it it in in the the form form of of nationalisation, tougher regulation, new new taxes, 

pressure on on business decisions or or simple “bank bashing”. 

For For most most of of our our respondents (but (but not not all) all) this this was was a a worrying development which 

endangered the the health of of the the banks by by distorting business judgment and, and, perversely, 

forcing them them to to take take risks risks they they might otherwise have have avoided. 

Increasingly, it it is is putting banks in in a a bind. Sir Sir Adam Ridley, chairman of of Equitas 

Trust, said said that that “further political interference is is a a certainty, much of of it it extremely 

ignorant, aggravated by by the the lack lack of of public sympathy or or understanding for for the the 

position of of the the banks, and and the the inability of of bank bank leadership to to explain or or defend 

rational behaviour on on their their part. part. The The biggest risk risk for for the the outside world is is that that the the 

banks are are overwhelmed with with restrictive pressures which prevent them them from from 

sustaining, let let alone increasing, their their lending to to the the real real economy”. 

Banks are 

simultaneously 

being told to to be be 

more prudent and 

to to lend more 

While a a lot lot of of the the concern came from from London-based respondents, this this was was by by no no 

means a British a obsession. It It was was echoed in in responses from from Switzerland, Germany, 

the the Netherlands, Central Europe, the the 

History tells tells us us that that when things get get US, US, China, South Africa and and 

desperate, politicians resort to to higher 

Australasia. A A credit risk risk manager at at 

taxation, suspension of of convertibility or or one one of of the the large large Swiss banks said said 

transferability, confiscation, and and that that “politicians have have the the ability to to 

changing coupons on on outstanding debt debt severely damage the the whole sector 

(all (all of of which have have happened in in living 

(more than than they they already have) e.g. e.g. 

memory). 

David Potter, investment banker 

Tobin tax, tax, Basel 3 3 etc”. etc”. The The chief chief 

financial officer of of one one of of the the large large 

regional US US banks said: said: “You only only 

have have to to look look at what what has has happened in in the the past past 10 10 years to to see see the the damage, and and we we 

have have a a major election headed our our way way in in 2012 with with both both political parties and and the the 

media wanting to to beat beat the the industry”. 

But But a a number of of respondents did did not not see see political interference in in such such a a negative 

light: they they said said it it was was a a necessary step step to to reform banks and and restore public 

confidence. A A banking consultant said: said: “I “I think the the current progress and and direction of of 

focus – – financial stability, prudential regulation, greater challenge and and critical 

thinking – – is is all all appropriate and and will will lead lead to to a safer a safer system. The The problem is is getting 

there”. 

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C S F I / New York CSFIBanking Banana Skins 2012 

6. 6. Regulation (3) 

Even Even though regulation is is supposed to to make make banks banks safer, safer, it continues it to to be be seen seen by by 

the the majority of of our our respondents (particularly bankers) as as excessive, and and therefore a a 

potential risk risk to to the the banking system and and to to the the wider wider economy. The The risks risks include 

higher costs, costs, management distraction, constraints on on profitability, and and reduced 

capacity to to lend. lend. And And these these assume that that regulation is is well-intentioned; many many 

respondents felt felt that that recent regulatory initiatives were were a form a form of of political retribution, 

intended to to teach teach the the banks banks a lesson. a The The director of of regulatory affairs at at a large a large British clearing bank bank said said that that the the 

“extreme risk risk aversion of of the the authorities” was was “leading to to an an inability of of banks banks to to 

make make sufficient returns, either either by by raising the the cost cost of of equity or or by by constraining their their 

ability to to raise raise prices. The The resulting inability to to monetise the the franchise while while being being 

required to to generate equity internally could could result result in damaging de-leveraging that that 

nobody intends”. 

The The culture of of blame 

There There seems to to be be a relentless a ‘blame’ culture which which shows no no sign sign of of abating. 

While While this this may may not not drive drive the the profound change in in leadership some some might might like, like, it it 

will will inevitably be be a barrier a to to entry entry for for the the new new entrants that that are are needed to to 

create the the lifeblood. There There is widespread is confusion on on what what the the role role of of banks 

should be, be, with with terms terms such such as as ‘socially useless’ persisting. There There is a is balance a to to 

be be had had between social social and and economic concerns: both both are are legitimate and and need need to to 

be be addressed. But But not not all all that that is wrong is with with society can can be be left left at at the the door door of of 

the the banks. 

Director, group risk, risk, UK UK clearer 

The weight of of 

regulation is is seen 

to to be be choking 

lending capacity 

A A director of of government affairs at at a large a large US US bank bank said said his his concern was was that that “as “as a a 

result result of of regulatory overload, the the banking industry will will become un-investable. Many Many 

banks banks will will then then fail fail to to attract private sector capital to to meet meet Basel Basel 3 or 3 or EU EU stress stress test test 

requirements, and and will will need need to to be be nationalised or or recapitalised by by public 

intervention”. 

Bankers might might be be expected to to say say this, this, but but similar views views emerged from from non-bankers. 

A A respondent from from one one of of the the large large credit credit rating rating agencies said: said: “Basel 3 3 

implementation will will make make earnings stability a a major major challenge for for all all affected 

banks.” He He feared that that new new funding requirements “will “will make make loans loans both both more more scarce 

and and much much more more expensive with with the the implications that that has has for for the the macro-economy”. 

Even Even regulators had had some some sympathy with with these these views. A A US US regulator said said that that 

“financial regulatory reform has has overshot the the mark mark and and will will be be a drain a drain on economic 

growth and and the the soundness of of the the banking sector”, and and a British a regulator agreed that that 

there there was was a risk a risk of of “management distraction”. Marcus Killick, chief chief executive of of 

Gibraltar’s Financial Services Commission, said said that that “more regulation will will not not mean mean 

better better regulation”. 

But But at at the the end end of of the the day, day, the the sector rankings speak speak for for themselves: for for bankers, this this 

was was the the No. No. 5 risk, 5 risk, for for non-bankers No. No. 12 12 and and for for regulators No. No. 24. 24. 

One One thread of of concern was was the the lack lack of of international coordination on on new new banking 

regulation. The The risk risk of of divergence was was seen seen to to be be particularly strong between the the EU EU 

and and the the US. US. A A US-based banker said said that that differences “will “will force force a change a in in the the 

17 17 




business model of of global banking, reduce market liquidity and result in in very heavy 

implementation and maintenance costs”. 

Although most of of the the comments about regulation came from the the international 

financial centres of of London and New York, there was plenty of of input from other 

territories. A senior banker in in Canada said that “regulatory risk is is a a huge issue”, a a 

view echoed by by respondents in in 

Switzerland, Continental Europe, 

The risk of of increasing capital to to a a level 

South East Asia, and Latin America. 

which stops banks paying an an adequate 

The chief risk officer of of a a Czech bank 

return to to equity investors is is huge and 

said that regulators were “forgetting 

avoidable. When the history of of the 

2020 banking crisis is is written, Basel 33 

that banking is is also a a business”, and 

capital requirements will be be seen as as a a banker in in China said that regulatory 

the main cause. 

cost “may overtake the the benefits that 

Corporate banker 

regulators expect to to bring to to the the 

public”. 

However, a a sizeable minority of of respondents applauded regulatory initiatives as as 

well-intentioned and necessary. Philip Warland, head of of public policy at at Fidelity 

Worldwide Investment, said that “most of of the the current wave [of [of regulation] is is good 

for for banks, but maybe not for for their current business models”. Some respondents felt 

that the the reforms did did not not go go far far enough. Diane Coyle, director of of Enlightenment 

Economics, said: “None of of the the reforms since late 2008 have tackled the the main 

vulnerability of of the the financial system, namely the the vast multiplicity of of links between 

very large and complicated institutions. The big global banks need to to be be broken up up 

into smaller and simpler entities, or or the the crisis could continue to to spiral into its its next 

phase, just as as it it has now on on its its euro leg.” 

7. Profitability (-) 

Banks’ earnings 

expectations have 

to be ‘managed 

down’ 

In In these stressful times, profitability has become a a long-term issue for for banks rather 

than just a a matter of of the the next quarterly earnings report. So So we we added it it to to the the list list in in 

this survey to to learn what people had to to say about the the risks to to banks’ ability to to 

maintain “adequate” profitability in in the the current environment. 

It It emerged as as a a high risk, with the the great majority of of our respondents believing that 

the the sector was undergoing a a fundamental shift in in profit expectations. Higher capital 

requirements, greater regulatory and compliance costs, curbs on on banking activities, 

higher “stable funding” costs, political pressure to to hold down prices –– all all of of these 

are are impacting bank profits, and are are likely to to be be around for for a a while. A UK bank chief 

executive said that “every aspect of of the the P&L is is under pressure”. 

Andrew Gray, banking partner at at PwC, said that “managing in in a a low growth, low 

interest rate environment will challenge many banks. Profitability will be be hard to to 

achieve, particularly as as capital levels required by by international regulators rise. The 

ability to to attract funds and generate sufficient returns will test even the the strongest 

banks”. 

Many respondents focused their comments on on the the banks’ rates of of return. 

Traditionally a a high return on on equity (ROE) business, banking is is now heading down, 

but how far? Bob Masi, a a risk manager at at Citigroup, said that “increased capital 

requirements, not to to mention bits of of legislation like Dodd-Frank, have transformed 

what was once an an 18% ROE industry into a a 12% ROE at at best.” Current return 

expectations, respondents said, were “fanciful” and needed to to be be “managed down”. 

18 18 



This This would, would, however, however, be difficult be difficult at a time at a time when when the banks the banks are also are also under under pressure pressure 

to increase to increase their their capital, capital, and there and there is always is always a danger a danger that that they they will will take take on more on more 

risk to risk keep to keep up their up their earnings. earnings. 

Looking Looking further further ahead, ahead, banks banks may may have have to adapt to adapt to an to environment an of low of low growth growth 

and and low low returns, returns, where where regulation regulation demands demands greater greater simplicity, simplicity, and and where where public public 

opinion opinion is ready is ready pounce pounce on any on sign any sign of excess. of excess. The The head head of strategy of strategy development at at 

a large a large UK bank UK bank said said that “massive that “massive restructuring, re-pricing re-pricing and cost-cutting and will will be be 

required required to reach to reach a model a model delivering delivering adequate adequate returns”. returns”. 

In the In short the short term, term, though, though, some some respondents thought thought banks banks should should do quite do quite well well out out 

of the of present the present environment, with with its cheap its cheap money, money, state state subsidies subsidies and constraints and constraints on 

competition. A couple A couple of respondents of even even described described banks banks as “rent as “rent gougers”. gougers”. 

8. 8. Derivatives (7) (7) 

Derivatives and complex and complex instruments are still are still seen seen as potential as potential sources sources of risk, of risk, but but 

the strength the strength of concern of concern seems seems to be to moderating, be and is and certainly is certainly not at not the at level the level it it 

was a was few a years few years ago when ago when it topped it topped the Banana the Banana Skins Skins poll. poll. 

Derivatives 

risk risk may may be be 

easing easing off off 

The The bad things bad things that that respondents say about say about them them centre centre mostly mostly on their on their opacity: opacity: the the 

fact fact that that few few people people really really understand understand them them and and that that true true exposures exposures are hard are hard to to 

measure. measure. A respondent A respondent from from one of one the of large the large financial financial trade trade associations spoke spoke of of 

“sprawling “sprawling OTC OTC derivative derivative positions positions creating creating unmappable potential potential liability liability 

patterns”, patterns”, and and a managing a managing director director at a at major a major US US investment investment bank bank said said that that 

“derivative “derivative exposures exposures dwarf dwarf pure pure balance balance sheet sheet risk”. risk”. Currently, Currently, credit credit default default 

swaps swaps are important are important links links the in chain the chain of bank of bank exposure exposure to major to major risks risks such such as as 

sovereign sovereign debt, debt, and and newer newer derivatives derivatives such such as Exchange as Exchange Traded Traded Funds Funds and and 

“NewCITS” could could be a be source a source of future of future trouble. trouble. 

But But many many respondents who who offered offered comments comments on this on this risk risk stressed stressed that that derivative derivative 

volumes volumes were were easing easing off, and off, that and deals that deals were were becoming becoming less complex. less complex. This This partly is partly 

because because banks banks have have introduced introduced better better controls controls since since the financial the financial crisis, crisis, and partly and partly 

the consequence the of tougher of tougher regulation regulation which which makes makes derivative derivative dealing dealing less attractive less attractive 

than than it was it was previously. previously. A US A regulator US regulator said said that the that risks the risks were were “significantly lower lower 

in the in the US US today today due due to the to the Dodd-Frank impact impact on swaps on swaps margins margins and and 

securitizations”. 

9. 9. Corporate governance (12) (12) 

Although Although corporate corporate governance has received has received a huge a huge amount amount of attention of attention since since the the 

onset onset of the of crisis, the crisis, there there is still is still a feeling a feeling that that banks banks are not are getting not getting it right: it right: the the 

effectiveness of boards, of boards, their their control control over over management, the the qualifications of of 

directors, directors, and the and impact the impact of regulation of regulation – concerns – concerns abound abound in all in these all these areas. areas. 

One One of the of biggest the biggest problems problems remains remains the complexity the complexity of large of large banking banking organisations, 

requiring requiring boards boards with with levels levels of knowledge, of control control and foresight and foresight at the at extremes the extremes of of 

human human capacity. capacity. John John Plender, Plender, banking banking commentator at the at Financial the Financial Times, Times, said said 

that “there that “there has not has been not been as much as much clearing clearing out of out boards of boards as would as would have have been been justified justified 

by the by crisis. the crisis. But there But there is also is also a shortage a shortage of people of people adequately adequately qualified qualified to play to play the the 

directors' directors' role in role unwieldy in unwieldy organisations of huge of huge complexity”. 

19 19 




Despite a lot a lot of of 

work, corporate 

governance 

remains an an issue… 

There There is also is also the the problem of bank of bank boards boards being being pressured or second or second guessed by by the the 

regulators. Some Some respondents felt felt that that regulators were were becoming “shadow directors” 

and and undermining directors’ accountability. One One bank bank CEO CEO thought thought that that “regulatory 

pressure will will lead lead companies to be to be so so risk risk averse averse that that they they will will not not go go for for sound sound 

business opportunities”. 

A number A number of respondents of made made the the point point that that the the skills skills required in times in times of stress of stress 

were were different from from those those in good in good times. times. The The risk risk manager at a at UK a UK bank bank said said that that 

“anyone can can make make money money in good in good times. times. Not Not losing losing money money in bad in bad times times takes takes skill skill 

that that I think I think very very few few have” have” . Other . Other respondents said said that that the the industry needed needed more more 

board board members with with knowledge of of 

Corporate governance sounds sounds great, great, IT, IT, risk, risk, geo-politics – even – even finance finance 

but but all of all the of the measures proposed since since – – to to help help them them get get on on top top of of the the 

the the BIS BIS document of 2006 of 2006 have have totally totally business’ complexities. Some Some felt felt 

failed failed to prevent to prevent disasters. One One has has to to that that the the more more gung-ho investment 

conclude that that such such governance in in 

banking culture culture was, was, in the in the words words of of 

banking is the is the triumph of hope of hope over over 

experience! 

one, one, “still “still the the dominant force force in the in the 

Steve Steve Davis, Davis, Banking consultant 

management of the of the sector”. sector”. 

Our Our respondents included bank bank 

directors who who described the the daunting nature nature of the of the task task before before them, them, among among them them 

Richard Farrant Farrant of Daiwa of Daiwa Capital Capital Markets, Europe, who who said: said: “Experience makes makes 

one one very very unconfident about about one's one's ability ability to oversee to oversee and and control control what what is really is really going going 

on.” on.” Another said: said: “In “In the the light light of events of events in 2007/8 in 2007/8 [corporate governance] must must 

always always be a be significant a risk”. risk”. 

But But even even though though this this emerged as a as high a high ranking ranking risk, risk, some some respondents thought thought that that 

it was it was overrated. It was It was easy easy to criticise to corporate governance with with hindsight, they they 

said, said, and and things things were were getting getting better. better. A US A US bank bank regulator said said that that “significant 

weaknesses exposed during during the the crisis crisis are are gradually being being addressed”. 

10. 10. Quality of of risk risk management (8) (8) 

…so …so does risk risk 

management 

Much Much is being is being done done by by the the banks banks to improve to their their risk risk management after after the the stresses stresses 

of the of the last last few few years. years. But But there there are are still still doubts doubts about about their their capabilities in this in this area. area. 

Why? Why? 

Much Much of it of has it has to do to do with with the the position of the of the risk risk management function inside inside banks: banks: 

it is it seen is seen to be to be second second order, order, lacking lacking independence, underfunded, too too reliant reliant on on 

mechanistic devices devices like like checklists 

Risk Risk management systems are are and and models. And And so so long long as as banks banks 

becoming more more robust, robust, but but still still lack lack have have generous bonus bonus schemes, there there 

the the ability ability to understand to what what trouble trouble will will always always be be an an encouragement to to 

the the human human brain brain can can create. create. 

excessive risk-taking. 

Nick Nick Hungerford, CEO, CEO, Nutmeg 

Charles Charles Stewart, senior senior director at at 

Moody's Analytics, observed that that 

“risk “risk management teams teams generally strive strive to do to do their their best best with with the the resources that that they they 

have have available. But But as long as long as the as the activity activity is treated is treated as a as necessary a evil evil rather rather than than as as 

a core a core strategic cost cost of doing of doing business (with (with the the need need for for appropriate and and strategic 

long-term investment in in human human capital, capital, technology and and resources), the the poor poor 

management of operational, of market market and and credit credit risks risks will will continue to be to the be the downfall 

of many of many a bank”. bank”. One One bank bank risk risk manager with with an obvious an interest interest the in the matter matter said said 

that that “the “the quality quality is eroded is eroded through poor poor reward reward structures for for risk risk personnel”. 

20 20 




This This Banana Banana Skin Skin would would have have come come higher higher up up the the ranking ranking but but for for the the view view that, that, for for 

all all their their shortcomings, banks banks are are at least at least trying. trying. Susan Susan Rice, Rice, managing director, 

Scotland, of of Lloyds Lloyds Banking Group, Group, said said that that “most “most banks banks have have significantly 

strengthened this this function in recent in recent years”. years”. 

11. 11. Pricing of of risk risk (9) (9) 

It was It was the the gross gross underpricing of risk of risk by by banks banks that that contributed to the to the 2008 2008 crisis. crisis. 

Have Have times times changed? 

Banks may may now now 

be be over-pricing 

risk risk 

Some Some respondents felt felt that that banks banks had had “learned the the lessons lessons of 2008” of 2008” and and were were taking taking 

a much a much more more conservative view view of risk of risk – even – even overpricing it. A it. UK A UK banker banker said: said: “I “I 

think think this this issue issue now is now well well understood and and unlikely to recur to recur for for a long a long time”. time”. 

But But others others believed that that the the quest quest for for profit profit and and the the investment banks’ banks’ innate innate risk risk 

culture culture were were still still leading leading them them to underprice to their their risks. risks. A regulator A said said that that this this 

risk risk “had “had abated abated coming coming out out of the of the financial crisis crisis and and is now is now increasing due due to a to a 

lack lack of of attractive asset asset opportunities”. Another problem is that is that asset asset prices prices have have 

been been so distorted so by by government and and central central bank bank support support that that accurate risk risk pricing pricing 

has has become much much more more difficult. Some Some respondents also also said said that that risk risk asset asset 

weightings and and capital capital adequacy requirements set set by by regulators were were adding adding to these to these 

distortions. 

12. 12. Business continuation (21) 

Regulators are are counting on on recovery and and resolution plans plans (RRPs) (RRPs) to mitigate to future future 

banking crises: crises: banks banks will will have have to have to have pre-approved plans plans to protect to protect the the system system if if 

they they run run into into trouble. But But will will these these plans plans be effective? be Will Will resolution 

plans stave off off 

a crisis? a There There was was a sharp a sharp divergence of views of views among among respondents. Many Many felt felt that that this this risk risk 

got got to the to the heart heart of the of the problem: the the interconnectedness of banks, of banks, the the vulnerability of of 

the the system system to a to single a single failure, failure, and and the the fact fact that that most most governments no no longer longer have have the the 

resources to rescue to rescue banks. banks. A regulator A said said that that “with “with governments unable unable to stand to stand 

behind behind banks, banks, any any bank bank failure failure would would have have contagious effects”. 

The The robustness of RRPs of RRPs was was therefore key. key. David David Grace, Grace, associate director at UBS, at UBS, 

said said that that “business continuation management (BCM) (BCM) is huge. is huge. Any Any issue/default or or 

BCM BCM event event would would have have a huge a huge knock-on impact impact on on other other participants”. 

Many Many respondents saw saw RRPs RRPs as a as point a point of strength of in the in the system. system. The The vice-chairman 

of a of multinational a bank bank said said that that “if “if anything, this this one is one of the of the few few areas areas where where risk risk 

is moderating”, is and and a US a US bank bank regulator said said that that “new “new SIFI SIFI [systemically important 

financial institutions] regulations and and resolution regimes will will eventually help help 

mitigate this this risk”. risk”. 

But But other other respondents feared feared that that RRPs RRPs missed missed the the point. point. A banking A consultant said said 

that that “plans “plans alone alone are are not not going going to to make make the the industry safer. safer. Structural change change is is 

required and and a better a better prudential understanding of of the the networks and and dependencies 

between banks. banks. RRPs RRPs should should help help with with this this – but – but there there needs needs to be to the be the recognition 

that that they they are are a tool, a tool, and and that that more more fundamental change change is required”. is 21 21 



Banking Banana Banana Skins Skins 2012 2012 

RRPs RRPs might might even even be counter-productive be in providing in a false a false sense sense of security. of security. Few Few 

countries countries have have formally formally adopted adopted them them (only (only the the UK UK and Switzerland according to to 

one one respondent) and and the the area area is rife is rife with with legal legal uncertainty over over bankruptcy laws. laws. 

Clive Clive Briault, Briault, formerly formerly a senior a senior UK UK banking banking regulator, now now adviser adviser to KPMG, to KPMG, said said 

that that “given “given the the under-developed state state of resolution of planning, planning, it would it would be foolish be foolish to to 

rely rely yet on yet these on these plans plans acting acting as a as defence a defence barrier”. barrier”. 

13. 13. Back office (24) (24) 

The The risks risks in the in the back back office office (systems, (systems, data data management, custody, custody, technical technical controls controls 

etc.) etc.) have have risen risen sharply sharply up the up ranking, the ranking, for two for two reasons: reasons: the stresses the stresses of the of crisis the crisis and and 

the the extra extra demands demands imposed imposed by new by new regulation. As As one one respondent said, said, the the less less 

banks banks trust trust each each other, other, like like now, now, the the more more important it is it that is that back back office office systems systems 

should should not fail. not fail. 

Regulatory change 

is is adding to to the the 

stresses on on the the 

back back office office 

For For many many respondents, this this was was still still a “Cinderella” a area area which which managements 

preferred preferred not not to get to get involved involved with, with, or allocate or allocate the the necessary investment despite despite the the 

obvious obvious risks, risks, viz. viz. the the recent recent rogue rogue 

We We seem seem to make to make life life overly overly trading trading incident incident at UBS. at UBS. The The head head of of 

complicated by having by having the the processing 

operational risk risk at a at large a large UK UK bank bank 

of transactions of travel travel all around all around the the saw saw revenue revenue pressures pressures creating creating “an “an 

world, world, sometimes on several on several endless endless cycle cycle of cost-cutting of in an in an 

occasions. 

Project Project manager, German German bank bank environment of of heightened 

operational risk”. risk”. 

“Complexity” was was a word a word that that cropped cropped up in up many in many responses: back back office office systems systems 

are now are now so complicated so that that they they are beyond are beyond the comprehension the of all of but all but a few a few key key 

staff. staff. Alasdair Alasdair Steele, Steele, partner partner at City at City law law firm firm Nabarro, Nabarro, said said that that “the “the ability ability of of 

senior senior management to understand to all the all the complex complex areas areas in sufficient in sufficient detail detail to allow to allow 

them them to challenge to the the assessment of the of the operating operating managers becomes becomes considerably 

greater greater when when there there are multiple are multiple complex complex business business lines”. lines”. Complexity may may also also grow grow 

if, as if, many as many expect, expect, the banking the banking industry industry now now goes goes through through a phase a phase of restructuring. of The The regulatory tsunami tsunami is also is also having having an impact. an impact. A respondent A from from Japan Japan said said that that 

systems systems risked risked being being overwhelmed by “the by “the rushed rushed implementation of Dodd-Frank, of Basel Basel 3, MiFID 3, MiFID 2 etc.” 2 etc.” and and a risk a risk director director at a at large a large Swiss Swiss bank bank said: said: “Complexity is is 

not the not issue; the issue; it’s the it’s level the level of regulation of being being layered layered onto onto banks banks to track to track it”. it”. 

However, respondents also also felt felt that that back back offices offices were were standing standing up well, up well, considering, 

and and that that the the risks risks were were exaggerated. Paul Paul Smee, Smee, director director general general of the of the UK’s UK’s 

Council Council of Mortgage of Lenders, Lenders, said said that that “bank “bank systems systems seem seem remarkably robust”. robust”. 

14. 14. Management incentives (16) (16) 

Concern Concern about about bankers’ bankers’ bonuses bonuses has has risen risen since since the the last last survey survey because because they they are are 

such such a visible a visible part part of the of the problem, problem, and and not not much much seems seems to have to have been been done done about about 

them them despite despite a number a number of regulatory of initiatives. But But having having said said that, that, many many 

respondents thought thought that that the risks the risks were were reputational rather rather than than financial. financial. 

The The debate about 

bankers’ bonuses 

The The case case against against incentives is familiar: is familiar: they they encourage short-termism and and excessive excessive 

continues 

risk-taking, and and are are mostly mostly upside. upside. Alan Alan Peachey, Peachey, a banker a banker who who compiled compiled Great Great 

Financial Disasters Disasters of our of our Time, Time, said said that that most most of the of hundreds the hundreds of incidents of incidents listed listed in in 

the the book book “were “were caused caused by dealers by dealers taking taking unacceptable risks risks in order in order to create to create 

22 22 



sufficient profits profits to generate to bonuses. These These comments apply apply not not only only to treasury to treasury 

operations but but also also to other to other areas areas of an of an institution such such as customer as business and and 

investments”. 

Nor, Nor, judging judging by by the the responses, was was this this just just a problem a in the in the developed world’s world’s 

“greedy” banks. banks. The The chief chief auditor auditor of a of large a large Malaysian bank bank said said that that “insufficient 

attention and and resources are are given given to to good good governance because because most most senior senior 

executives think think that that it impedes it growth, growth, which which in turns in turns impedes their their bonuses”. 

The The real real cause cause for for concern concern for for many many respondents was was whether whether bankers bankers propose propose to do to do 

anything about about them. them. Christopher O'Brien, director director of of the the Centre Centre for for Risk Risk and and 

Insurance Studies Studies at the at the University of Nottingham, of said said that that “bankers just just haven't haven't 

learned learned the the lessons lessons this, on this, and and don't don't seem seem to care”, to care”, and and a central a central banker banker said said he had he had 

no no problem with with incentive pay pay so long so long as it as was it was based based on on reality. reality. “But “But the the senior senior 

management of banks of banks and and their their boards boards have have got got completely out out of touch of touch with with the the 

rest rest of society of society when when it comes it comes to remuneration, to and and for for no good no good reason.” 

But But the the counter counter view view was was that that the the bonus bonus issue issue is, is, in the in the words words of of one one of of the the 

respondents, “massively overrated”. A director A director of prudential of regulation said said that that “the “the 

level level of bank of bank pay pay is offensive is and and unjustified. However, the the role role of remuneration of in in 

encouraging risky risky behaviour is hopelessly is exaggerated”. Many Many respondents pointed pointed 

out out that, that, faced faced with with political political and and regulatory pressure, banks banks are are trying trying to curb to curb 

bonuses bonuses and and link link them them to more to more fundamental measures of performance. of The The chief chief 

financial officer officer a of large a large Canadian bank bank said said that that while while the the issue issue of bankers’ of pay pay 

was was overblown from from the the soundness perspective, “it “it can can become become a reputational a issue issue 

for for banks, banks, especially where where they they are are bailed bailed out”. out”. 

15. 15. Change management (28) 

A A lot lot of of 

restructuring 

lies lies ahead 

In earlier In earlier Banana Banana Skin Skin surveys, we we asked asked respondents to rank to rank the the risk risk of “merger of “merger 

mania”, mania”, which which usually usually came came out out low low on on the the scale. scale. But But with with a lot a lot of restructuring, 

of deleveraging, downsizing and and general general strategic rethinking going going on, on, we we thought thought it it 

more more instructive to probe to probe the the risks risks in the in the wider wider process process of crisis-driven of change. change. 

And And clearly, clearly, there there are are causes causes for for concern. Philip Philip Middleton, head head of of central central 

banking at Ernst at Ernst & Young, & Young, said said that that current current problems were were likely likely to lead to lead to to 

“severe “severe uncertainty…and the the most most fundamental restructuring in in European 

financial services in a in generation”. a But But the the banking banking industry has has a mixed a mixed record record 

when when it comes it comes to big to big strategic moves, moves, and and our our respondents were were quick quick to remind to remind us us 

of the of the sorry sorry examples of Royal of Royal Bank Bank of Scotland’s of acquisition of ABN of ABN Amro, Amro, and and 

Lloyds Lloyds Banking Group’s politically enforced merger merger with with HBOS. HBOS. 

Much Much of the of the structural change change that that lies lies ahead ahead will will be driven be driven by regulatory by pressure to to 

reduce reduce the the size size of banks of banks that that are are “too “too big big to fail”, to fail”, and, and, as one as one respondent pointed pointed 

out: out: “Changes resulting from from regulatory requirements are are particularly difficult difficult to to 

manage manage efficiently”. A further A further problem is that is that a lot a lot of change of change will will be taking be taking place place at at 

once, once, adding adding to the to the uncertainty and and affecting prices. prices. A banking A banking consultant foresaw foresaw a a 

situation “where “where many many banks banks are are seeking seeking to divest to divest at the at the same same time. time. Who Who and and where where 

are are the the buyers?” All All this this could could bring bring on “restructuring on fatigue”. 

Nonetheless, many many respondents thought thought restructuring was was a necessary a step step to restore 

restore 

health health to a to bloated a bloated and and over-complex banking banking system. system. A central A central banker banker said said that that 

“short “short term term losses losses will will quickly quickly turn turn into into longer longer term term strengths and and sustainability. All All 

diets diets have have short short term term costs costs but but a slim a slim waistline provides a new a new lease lease of life”. of life”. 

23 23 




16. 16. Hedge funds (19) 

Although hedge hedge funds funds continue to be to seen be seen as a as middling a risk, risk, the the responses reflected 

a growing a sense sense of unease of unease about about the the wider wider “shadow” banking banking sector: sector: its its size size and and 

opacity, opacity, and and the the lack lack of regulation. of The The ‘shadow’ 

banking sector 

could benefit from from 

current trends 

Stewart Stewart Fleming, a financial a commentator and and associate fellow fellow at Chatham House, House, 

said: said: “I continue “I to worry to worry about about the the unexpected… There There are are too too many many areas areas of the of the 

global global financial system system about about which which we we know know far far too too little.” little.” 

One One risk risk that is that the the regulatory squeeze squeeze now now being being applied applied to banks to banks will will drive drive 

business into into the the shadow shadow banking banking sector sector where where their their activities will will be less be less closely closely 

scrutinised. Morten Morten N. Friis, N. Friis, chief chief risk risk officer officer at the at the Royal Royal Bank Bank of Canada, of Canada, said said that that 

“regulatory changes changes are are causing causing renewed growth growth of the of the unregulated shadow shadow banking banking 

system”. 

But But there there was was also also a lot a lot of sympathy of for for hedge hedge funds: funds: respondents pointed pointed out out that, that, 

contrary to the to the popular popular view, view, particularly on on the the Continent, many many of them of them did did not not 

engage engage in short-selling, that that they they were were a source a source of liquidity, of and and that that they they provided 

services services that that mainstream banks banks no no longer longer wanted wanted to or to could. or could. Stuart Stuart Trow, Trow, credit credit 

strategist at the at the European Bank Bank for for Reconstruction and and Development, pointed pointed out out 

that that hedge hedge funds funds “might “might help help in terms in terms of being of being among among the the few few buyers buyers of assets of assets the the 

banks banks need need to unload”. to 17. 17. Interest rates (14) 

Steady outlook for for 

interest rates 

The The outlook outlook seen seen by most by most respondents is for is for a long a long period period of low of low interest interest rates, rates, and and 

little little volatility. The The risks risks lie lie less less in uncertainty about about rate rate movements than than in the in the 

persistence of low of low yields yields and and a flat a flat yield yield curve, curve, both both of which of which complicate the the job job of of 

making making banking banking profits. profits. 

Peter Peter Hahn Hahn of London’s of Cass Cass Business School School said said that that “the “the risk risk that is that income income 

generation will will be weak be weak in a in low a low rate, rate, low low demand demand environment”. A regulator A said said 

that that “current “current low low rates rates are are squeezing bank bank margins margins and and contributing to to lower lower 

earnings. Any Any rate rate shock shock up up would would lead lead to to immediate losses losses on on investment 

portfolios. Double Double jeopardy for for interest interest rates rates makes makes this this a certain a certain high high risk”. risk”. 

Aaron Aaron Brown, Brown, a risk a risk manager at AQR at AQR Capital Capital Management in the in the US, US, made made the the 

point point that that since since interest interest rates rates are are being being manipulated for for the the benefit benefit of banks of banks “this “this is 

likely likely to be to a be source a source of support, of support, not not a source a source of risk”. of risk”. But But the the chief chief executive of a of a 

UK UK building society society pointed pointed up the up other other side side to this to this coin: coin: “By “By assisting the the banks, banks, 

the the government are are making making life life more more difficult difficult for for building societies. Interest Interest rates rates 

need need to be to increased be to assist to assist margins margins the in the sector”. sector”. 

Some Some respondents also also wondered whether whether the concept concept of a of “risk-free a rate rate of return” of return” 

could could still still be be said said to exist, to exist, given given that that so many so many sovereign borrowers had had now now lost lost 

their their triple triple A status. A status. David David Shirreff, European business correspondent of of The The 

Economist, said said that that “even “even if the if the euro euro is saved, is saved, the the banks banks face face a revolution a in the in the 

concept concept of of what what is risk-free. Where Where do do they they stash stash capital capital if not if not in high-grade in sovereign bonds?” bonds?” 

24 24 



18. 18. High dependence on on technology (18) 

Banking 

technology is is 

undergoing a a 

tough test test 

This This not is not the the high high profile profile end end of the of the risk risk business, but but a key a key one nonetheless as as 

banking banking becomes more more technology driven. driven. As As a Japanese respondent said: said: “The “The 

banking banking industry is effectively is a technology a industry”. Geographically, this this was was a a 

conspicuous concern concern in the in the Far Far East, East, notably notably China. China. 

The The concerns are are twofold. One One is the is the adequacy of banks’ of banks’ plans plans to deal to deal with with failure failure in in 

a high a high impact, impact, albeit albeit low low probability, area. area. Worries Worries centred centred on on the the level level of of 

management understanding of technology, of and and banks’ banks’ high high dependence on on a few a few 

key key people. people. One One respondent said said that that “too “too many many process process critical critical IT staff IT staff are are being being 

fired fired – short – short term term focused focused management decisions”. 

Many Many respondents expected that that the the robustness of of bank bank technology would would be be 

severely tested tested by by the the current current banking banking conditions. There There was was “an “an increased risk risk at at 

present present due due to to a nervous a nervous and and volatile volatile market market background amplifying the the 

consequences, though though not not the the probability, of failure”, of said said a respondent a from from one one of of 

the the German German Landesbanks. 

The The other other concern concern is vulnerability is to hacking. to A respondent A from from a large a large US US clearing clearing 

house house said: said: “I think “I think this this risk risk much is much underrated. Dependence on technology on is huge, is huge, 

and and there there has has been been a sharp a sharp increase in cyber in cyber crime crime which which can can cause cause damage. Witness Witness 

Sony, Sony, which which isn’t isn’t a bank a bank obviously, but but the the principle is established”. A US A US regulator 

said said that that the the real real worry worry is “the is “the increasing sophistication of hackers”. of Some Some respondents felt felt that that these these risks risks were were manageable. A Swiss A Swiss banker banker said said that that 

“the “the complexity of the of the business is decreasing is following regulatory reform”. 

19. 19. Currencies (11) 

A surprise, A perhaps, to see to see this this risk risk so lowly so lowly rated rated given given the the crisis crisis in the in the eurozone. 

But But there there is clearly is clearly a distinction a to be to be made made between the the macro-economic risks risks 

associated with with a troubled a currency union union (which (which are are seen seen to be to huge), be huge), and and the the more more 

specific specific risks risks in currency in trading. trading. Here, Here, as many as many respondents pointed pointed out, out, the the banks banks 

have have a lot a lot of experience of – and – and might might even even see see currency upheaval as an as important 

source source of business. of Currency is is seen seen 

as as a low a low risk risk 

despite the the euro euro 

Nonetheless, the the euro euro was was the the focus focus of most of most responses, partly partly because because of potential of turbulence, but but also also because because it could it could throw throw up some up some unfamiliar risks. risks. One One said said that that 

“a euro “a euro meltdown seems seems almost almost certain. certain. Any Any break-up of such of such a system a system of fixed of fixed 

exchange rates rates will will be loss be loss making making for for some”. some”. 

If it If occurs, it occurs, fragmentation of the of the eurozone would would almost almost certainly result result in currency in redenomination, with with a tangle a tangle of difficult of difficult legal legal issues. issues. One One respondent said: said: “Look “Look 

at Greek at Greek euros. euros. What What would would happen happen to all to all sorts sorts of contracts of in the in the event event of exit of exit / / 

enforced exchange to new to new currency / devaluation / / effect / effect of exchange of controls controls / / 

investment currency premium etc.?” etc.?” 

But But some some respondents felt felt that that banks banks might might even even profit profit from from a break-up: a the the 

volatility would would generate a lot a lot of of business, and and if the if the crisis crisis resulted resulted in in more more 

currencies to trade, to trade, bully bully for for the the banks. banks. The The risk risk director director of a of Finnish a Finnish bank bank said said that that 

“the “the dismantling of the of the euro euro might might bring bring new in new risks, risks, but but on on the other other hand hand also also 

opportunities”. 

25 25 




For For once once in this in this long-running survey, survey, the the dollar dollar and and the the renminbi earned earned scarcely scarcely a a 

mention, and and the the phrase phrase “currency wars” wars” did did not not appear appear at all, at all, suggesting that that the the 

focus focus of currency of risk risk has has undergone a major a major shift. shift. 

20. 20. Business practices (22) 

Conduct of of 

business needs 

to to improve 

With With all the all the scandals scandals over over mis-selling in recent in recent years, years, banking banking business business practices 

should should be be improving. Many Many respondents thought thought that that the the banks banks understood the the 

problem problem and and were were responding to regulatory pressure. A senior A senior Canadian banker banker said said 

that that “this “this a risk, a risk, but but the the industry industry is more is more aware aware of it, of and it, and applies applies more more rigour”. rigour”. 

In the In the US, US, the the creation creation of the of the Consumer Financial Protection Bureau Bureau will will lead lead to to 

much much closer closer regulation of bank of bank practices in consumer in financial products, including 

mortgages and and credit credit cards. cards. Similarly, in the in the UK, UK, the the arrival arrival of the of the new new Financial 

Conduct Conduct Authority is expected is to have to have a powerful a effect. effect. One One head head of regulatory of and and operational risk risk said said that that “conduct of business of business is the is the greatest greatest risk risk with with the the FCA FCA 

the the spectre spectre at the at the gate”. gate”. 

But But others others were were less less optimistic, which which may may be be why why this this risk risk has has risen risen up up the the 

rankings rankings a bit. a bit. Has Has there there really really been been much much change? change? A central A central banker banker thought thought the the 

risk risk was was “quite “quite high, high, as for as for most most customers the the banks banks seem seem to be to be operating in in 

another another space-time dimension – hence – hence the the Occupy Occupy movement. They They do do need need to to 

think think and and act act differently”. Also, Also, the the risk risk of legal of legal action action for for past past misdeeds remains. remains. 

Some Some respondents felt felt that, that, as the as the banks banks came came under under profit profit pressure, this this was was an area an area 

where where standards could could easily easily slip. slip. One One of them of them said: said: “Using “Using the the UK UK as an as example, an it appears it appears that that banks banks have have not not learned learned their their lesson lesson from from past past mis-selling scandals. 

Banks Banks must must improve improve their their act act in this in this area, area, but but in reality in reality they they are are being being pushed pushed to find to find 

abnormal profits profits at the at the expense expense of their of their weakest weakest retail retail clients clients by the by the need need to boost to boost 

earnings earnings to generate to generate the the new new higher higher levels levels of capital of capital required required by Basel by Basel 3”. 3”. 

One One problem problem highlighted by respondents by was was that that this this was was more more of a of reputational a than than a financial a risk, risk, and and had had little little material material impact impact on banks’ on banks’ performance, so banks so banks 

could could take take calculated risks risks if they if they chose chose to. to. One One of them of them said: said: “It is “It a is peculiarity a of of 

banking banking that that major major banks banks can can be involved be in repeated in repeated mis-selling scandals scandals without without 

going going out out of business. of Maybe Maybe reputations in banking banking are are now now so low so low that that it is it hard is hard to to 

incur incur reputational loss”. loss”. 

21. 21. Equity markets (10) 

The The risk risk that that banks banks will will lose lose money money through through the the equity equity markets markets is not is not seen seen to be to be 

high: high: direct direct exposure is limited is limited and and proprietary trading trading is being is being discouraged by the by the 

regulators. However an equity an equity market market collapse collapse would would have have consequences that that would would 

affect affect banks banks through through a fall a fall in general in general economic growth growth and and in the in the value value of their of their 

collateral – and – and in lower in lower financial confidence. 

If there If there are are direct direct risks, risks, they they lie more lie more in the in the loss loss of revenue of revenue from from brokerage activities 

on behalf on behalf of clients, of clients, or through or through losses losses suffered suffered by the by the clients clients themselves. A regulator A said said that that this this was was “a modest “a modest risk. risk. But, But, as seen as seen from from the the internet internet bubble bubble equity equity 

correction, not not nearly nearly as impactful as as a as debt a debt driven driven crisis”, crisis”, and and a Swiss a Swiss banker banker said said it it 

was was “moderate as a as risk a risk and and comparatively easy easy to manage to manage and and hedge”. hedge”. 

26 26 



The The view view from from the the flip flip side side 

Developed 

countries are are 

‘a powder ‘a keg keg 

waiting to to 

explode’ 

While While bankers bankers in industrial industrial countries countries weigh weigh the risks the risks in developing developing markets, markets, 

there there is a flip is a side flip to side this: to this: the emerging the emerging markets’ markets’ concerns concerns that the that troubles the troubles of of 

industrial industrial economies economies will hit will their hit their own growth own growth prospects. prospects. A US A regulator US regulator said said 

that “given that “given the dependence the dependence of the of western the western world world on growth on growth from from emerging emerging 

markets, markets, this this a much is a much more more material material issue issue today”. today”. 

The chief The chief financial financial officer officer a large of a large Chinese Chinese development bank bank said that said the that the 

uncertainties about about the world the world economy economy plus upward plus upward pressure pressure on the on renminbi the renminbi 

“have “have led to led a sharp to a sharp drop drop in export in export orders” orders” in China, China, while while the growing the growing sense sense of of 

risk in risk banking banking markets markets was causing was causing “funds “funds to flow to increasingly flow increasingly out of out emerging of emerging 

market market countries, countries, including including China, China, [leading [leading to a] to shrinking a] shrinking of domestic of domestic market market 

liquidity liquidity and surging and surging inter-bank inter-bank interest interest rates”. rates”. 

These These concerns concerns were were echoed echoed by respondents by in many in many parts parts of the of world. the world. The The 

chief chief economist economist of a bank of a bank in Namibia in Namibia said that said “the that biggest “the biggest challenge challenge is how is the how the 

current current sovereign sovereign debt debt crisis crisis will unfold will unfold over over the next the next three three years years and impact and impact 

the global the global growth growth outlook outlook and in and turn in affect turn affect the operating the operating environment”. The The 

executive executive vice-president of a large of a large bank bank in the in Philippines the Philippines was worried was worried that that 

“over “over the next the next two to two three to three years, years, the industry the industry will not will be not able be to able absorb to absorb the the 

shockwaves shockwaves from from the geo-political the geo-political arena arena where where the US, the China US, China and Europe and Europe are a are a 

virtual virtual powder powder keg that keg may that may explode explode if not if managed not managed well”. well”. 

In several In several countries, countries, there there is concern is concern about about the knock-on the knock-on effect effect of a collapse of a collapse in in 

banking banking confidence. confidence. In Romania, In Romania, a senior a senior banker’s banker’s top worry top worry was “the was lack “the of lack of 

trust trust in banks in banks and excessive and excessive coverage coverage of bad of news bad news about about banks”, banks”, and a and Turkish a Turkish 

banker banker said that said the that “lack the “lack of confidence of confidence the on international the markets markets is making is making 

it hard it hard to raise to raise needed needed capital”. capital”. In Malaysia, In Malaysia, Ashok Ashok Ramamurthy, deputy deputy CEO CEO of of 

the AMM the AMM banking banking group, group, said that said financial that financial institutions institutions “are facing “are facing 

unprecedented pressures pressures that require that require dynamic dynamic and clever and clever handling. handling. Not all Not FI's all FI's 

are equipped are equipped to deal to with deal with these these issues issues correctly!” correctly!” 

In Russia, In Russia, bankers bankers felt more felt more insulated insulated from from global global trends trends because because of the of size the of size of 

the economy the economy and its and relatively its relatively small small banking banking exposure exposure to sovereign to sovereign debt. debt. 

However However there there was concern was concern there, there, too, about too, about the country’s the country’s sluggish sluggish economy economy 

and the and growth the growth in credit in credit risk. risk. The head The head of risk of analysis risk analysis at one at of one the of country’s the country’s 

leading leading banks banks said that said credit that credit was “one was “one of the of main the main risks risks due to due the to the 

deteriorating economic economic environment”. 

This survey This survey also drew also drew several several responses responses from from the microfinance the industry industry which which 

has found has found that it that is not it is immune not immune to global to global pressures, pressures, and where and where concern concern about about 

the overindebtedness the of low of income low income borrowers borrowers is growing. is growing. 

In a separate In a separate context, context, banks banks need need healthy healthy equity equity demand demand if they if they are to are raise to raise the large the large 

amounts amounts of new of new capital capital demanded demanded by regulators, by regulators, and persistent and persistent weakness weakness in these in these 

markets markets would would be a hindrance. be a hindrance. 

22. 22. Emerging markets (17) (17) 

Views Views about about the risks the risks in emerging emerging markets markets were were very very divided. divided. 

Many Many respondents respondents said said that, that, whatever whatever their their prospects, prospects, the risks the risks in these in these countries countries 

were were minimal minimal compared compared to those to those in developed in developed markets. markets. More More than than that: that: many many of of 

these these markets markets were, were, relatively relatively speaking, speaking, strong, strong, and a and source a source of stability of stability for the for the 

world world economy. economy. They They also also had had governments which which could could respond respond much much more more 

effectively effectively to global to global shocks shocks than than those those of mature of mature markets. markets. Alexander Alexander Hoare, Hoare, 

managing managing partner partner of C. of Hoare C. Hoare & Co & in Co the in UK, the UK, said: said: “I regard “I regard Africa Africa as less as risky less risky 

27 27 




than than Europe in in some senses”, and and Gerard Lyons, chief chief economist at at Standard 

Chartered, said said that that in in contrast to to the the debt debt and and deleveraging of of the the West, “the “the 

economic environment in in the the East East is is a big a big opportunity”. 

Emerging markets 

look in in better 

shape than 

developed 

markets 

Nonetheless, there there was was a strong a current of of concern in in the the responses about emerging 

markets’ ability to to spring nasty surprises. The The big big uncertainty is is China which many 

respondents said said was was becoming a a 

worry (See (See box box p12). 

The The increasing unemployment in in people 

under the the age age of of 35 35 and and the the resultant 

lack lack of of acceptable living standards and and Elsewhere, a a respondent warned that that 

access to to basic services is is leading to to “over-rapid growth in in the the BRICS and and 

social unrest that that will will spread, especially 

Turkey is is a a threat, and and when this this 

in developing countries. This This threatens 

slows, I I believe banks in in those 

to to destabilise countries where financial 

countries will will turn turn out out to to be be sitting on on 

institutions will will be be severely affected. 

Philip Wessels, chief risk risk officer, 

significant asset asset quality problems”. A A 

Nedbank, South Africa 

respondent from from South Asia Asia said said that that 

“growth in in India has has already declined 

dramatically, and and growth in in 

Bangladesh and and Nepal has has been been galloping ahead too too quickly. We’ll see see more 

consolidation in in the the sector, which is is not not necessarily a bad a bad thing in in the the long long run. run. But But 

in in the the short short term, it it means less less access to to finance. We’re certainly seeing this this in in 

India”. There was was also also concern about funding and and credit quality in in responses from from 

Latin America. 

23. Rogue trader (20) 

Despite the the incident at at UBS UBS a a few few months ago, ago, rogue trader risk risk is little little changed 

from from last last time, with with most most respondents seeing it it as as an an ongoing business hazard which 

seldom has has more than than local local implications. A A senior investment banker said said this this was was 

“always a risk a risk but but unlikely to to be be as as material as as other areas”. 

Banks make 

‘the perfect 

playground for for 

rogue traders’ 

Nonetheless, the the UBS UBS case case accelerated management and and strategic changes at at the the 

bank bank and and will will doubtless have have prompted risk risk reviews at at all all its its competitors – – as as well well 

as as closer regulatory scrutiny. A A Swiss trust trust banker said: said: “One would hope hope other 

banks have have heard the the footsteps post post UBS”. Also, tougher economic times, along 

with with cuts cuts in in bonuses and and volatile markets, may may create a a breeding ground for for more 

unauthorised trading. 

One One question is is whether the the size size and and complexity of of financial institutions makes 

them, in in the the words of of a a respondent, “the “the perfect adventure playground for for rogue 

traders” which no no amount of of control will will correct, or or whether the the downsizing and and 

tougher regulation that that banks are are now now going through will will make it it harder for for rogue 

traders to to get get away with with it. it. If If there’s one one thing rogue traders are are good good at, at, it it is is finding 

new new ways to to crack the the system. 

24. Criminality (27) 

The The risks risks of of fraud, hacking, cyber attack, theft theft of of confidential information etc. etc. are are 

seen seen to to be be low low order, at at least least compared to to all all the the other risks risks around. Many 

respondents said said that that banks have have strong controls in in place, that that regulators are are keeping 

a close a eye eye on on problems like like money laundering, and and that, that, as as one one risk risk manager said, said, 

“while a a constant threat, it it will will not not bring down many banks without insider 

involvement”. Ian Ian Bancroft, a managing a director of of the the Cayman National Bank and and 

28 28 


C S F I / New York CSFIBanking Banana Skins Skins 2012 


Cyber attacks 

on on banks 

are are growing 

Trust Trust Company, said said he he didn’t didn’t see see “any “any pressing concerns in in this this area area over over and and 

above above those those that that have have arisen arisen over over the the past past few few years”. 

years”. 

But But there there are are risks. risks. One One is that is that crime crime tends tends to to rise rise during during a recession. a Another is the is the 

growing sophistication of of criminals, especially in in the the electronic world world at at a time a time 

when when more more financial business is is being being digitised. The The director of of legal legal and and 

compliance at at a Dutch a Dutch bank bank said said that that “criminals get get smarter by by the the week. week. This This is a 

a 

huge huge risk risk to to banks”. A A third third is is bank bank vulnerability to to tougher tax tax disclosure 

requirements, such such as as the the US’ US’ FATCA, and and the the general push push by by cash-strapped 

governments to to pursue pursue tax tax evaders. 

Many Many respondents made made the the point point that that the the real real risk risk is is not not monetary loss loss or or 

destabilisation, but but reputation. The The head head of of operational risk risk at at a large a large UK UK bank bank said said 

that that “the “the exposure is is principally a a reputational risk. risk. It It is is unlikely to to be be lifethreatening 

in in the the short-term”. 

life- 

25. 25. Sustainability (25) 

Some Some respondents wondered why why we we bothered to to ask ask a question a about about the the risks risks to to 

the the long-term sustainability of of the the banking business: its its reputation, its its ethics, ethics, its its 

social social utility. utility. It It was was hard, hard, they they replied, to to see see things things getting getting any any worse. worse. But But if if so, 

so, 

why why does does this this risk risk come come so so far far down down the the list? list? 

Reputation risk 

risk 

has has had had little 

impact on on bank 

earnings 

Here, Here, opinions were were divided. The The more more generous-minded felt felt that that the the banks banks were were 

trying trying to to do do better, better, partly partly out out of of self-interest, partly partly under under intense intense political and and 

regulatory pressure. Bankers understood that that the the lack lack of of confidence in in their their industry 

was was not not just just a moral a moral question but but a matter a matter of of business survival. It It was was therefore 

unfair unfair that that they they should should continue to to be be assailed by by popular “Occupy” movements and and 

daily daily bashing by by the the media media and and politicians. A A banking consultant said said that that “this “this risk risk 

would would be be higher higher except except for for the the current current regulatory pressure which which is is forcing forcing the the 

banking industry to to respond and and make make changes in in this this area”. area”. 

The The bail-out of of banks banks through the the TARP TARP funds funds has has already created a a 

lack lack of of trust trust and and faith faith in financial institutions with with the the general public. 

public. 

The The financial industry must must do do a better a better job job of of explaining how how they they 

have have repaid repaid these these funds, funds, and and are are now now better better positioned to to help help the the 

economy recover. Financial institutions must must lend lend money money in in such such a a 

way way as as to to create create domestic jobs, jobs, or or we we will will continue fighting this this 

reputational / lack / lack of of trust trust issue. issue. 

Edwin Edwin A. A. Link, Link, senior senior vice vice president, Wells Wells Fargo Fargo Bank, Bank, US US 

The The less less charitable felt felt that that little little had had changed. The The reputational damage that that the the 

banks banks have have suffered seems seems to to have have had had relatively little little impact impact on on their their behaviour. A A 

banking consultant said said that that “it's “it's hard hard to to see see that that this this state state of of affairs affairs has has done done much much 

to to undermine their their profits”. Michael Mainelli, executive chairman of of Z/Yen Z/Yen Group, 

Group, 

said said that that “banks “banks have have lost lost public public support but but don't don't seem seem to to have have noticed. A A 

combination of of a few a few disasters requiring more more bail-outs could could lead lead to to complete 

nationalisation”. 

An An Australian banker banker also also addressed the the more more specific concern about about the the 

evaporation of of trust trust in in the the banking markets. “The “The fundamental concern for for me me is is the 

the 

restoration of of confidence that that financial institutions have have in in each each other. other. Without this, this, 

I see I see a a very very slow, slow, protracted return return to to health health for for the the global global economy.” Some Some 

29 29 




respondents saw saw a a longer term term risk risk that that the the banking industry would become 

complacent behind its its protective barriers of of regulation and and state state guarantees, and and that that 

this this would delay the the recovery of of public trust. 

Also, it it depends on on what what you you mean by by reputation risk. risk. By By one one definition, the the huge huge 

increase in in regulation and and political interference suffered by by the the banks is is a a direct 

consequence of of the the poor poor reputation they they have have acquired for for themselves. 

26. Commodities (13) 

The The risks risks in in commodities are are seen seen to to be be slight so so far far as as banks are are concerned. Few Few 

are are large large players in in these markets, and and there there are are well-tried means of of hedging price price 

volatility. 

Nonetheless, commodity price price movements are are closely linked to to the the fortunes of of the the 

macro-economy, and and uncertainty about the the prospects both both for for the the developed world 

and and the the BRICS could produce some unwelcome surprises. One One respondent said: said: 

“Prices can can move very very fast fast here here – – fortunately positions are are typically small”. 

Banks also also have have business exposure to to companies and and dealers who who are are direct dealers 

in in these markets. 

27. Fraud (15) 

Fraud risk is is 

seen to to be be 

manageable 

The The consensus is is that that fraud is is a permanent a but but manageable risk, risk, even even if if it it may may be be 

rising now now because of of the the difficult economic climate. The The chief executive of of a UK a UK 

bank bank said: said: “Economic hardship usually leads to to higher fraud. Insider fraud and and 

account takeover are are the the two two most most likely areas of of exposure”. A A US US banker said said that that 

“we “we will will continue to to have have incidents of of fraud, as as financial institutions are are combating 

crime rings rings that that are are well-organized, well-funded, disciplined and and focused. Better 

cooperation between the the public and and private sectors going forward is is critical in in 

fighting these crime rings”. 

But But the the chance of of a large a life-threatening fraud is is seen seen to to be be low low and and certainly less less 

costly than than bank bank losses resulting from from poor poor decisions at at the the top. top. “This will will always 

be be an an issue, but but will will never match losses from from credit or or bad bad management”, said said the the 

chief investment officer at at a large a large UK UK institutional investor. But But the the chief financial 

officer of of a a US US bank bank said said that that “it “it is is still still an an expense to to keep keep up up with with security 

measures to to avoid a loss a loss of of confidence in in the the market”. 

28. Human resources (-) 

We We included a question a on on human resources for for the the first first time time this this year year because there there 

seemed to to be be rising concern about banks losing “talent” since the the crisis, for for a a 

number of of reasons: bonuses are are being cut, cut, bankers are are becoming social outcasts, the the 

business is is being regulated to to death. 

The The position of of this this risk risk in in the the rankings speaks for for itself: it it is is not not perceived to to be be a a 

large large one. one. People still still want want to to be be bankers because they they see see it it as as an an interesting and and 

rewarding career. As As one one respondent said: said: “It’s “It’s losing the the glitz glitz factor, but but it’s it’s still still 

attractive”. 

30 30 




People still still want want 

to to be be bankers, 

despite the the crisis crisis 

Part Part of the of the reason reason for job for job demand, demand, of course, of course, is that is that banks banks are are downsizing and and good good 

banking banking jobs jobs are are scarce. scarce. A respondent A from from one one of the of the large large Swiss Swiss banks banks said said that that 

“in “in spite spite of the of the anti-banker sentiment, numbers numbers applying applying to join to join the the industry industry have have 

not not declined declined noticeably”. Also, Also, the the pay pay continues to be to good. be good. 

But But there there are are worries. worries. A senior A senior UK UK clearing clearing banker banker wrote: wrote: “Against “Against [the [the economic] 

backdrop, and and continuing vilification of the of the industry industry by media by media and and politicians, allied allied 

to a to squeeze a squeeze on remuneration (in mainstream (in financial financial services, services, not not just just investment 

banking), the the recruitment and and retention retention of high of high quality quality staff, staff, and and encouragement of a of a 

flow flow of young of young talent talent into into the the industry industry risks risks becoming a systemic a systemic issue.” issue.” 

Another Another concern concern is that is that as mainstream as banking banking becomes becomes more more heavily heavily regulated and and 

“boring”, the the creative creative talent talent will will seek seek better better opportunities in the in the “shadow” banking banking 

sector, sector, which which many many see see as a as bad a bad thing. thing. According to one to one London-based respondent: 

“Bankers are are seen seen as pariahs as pariahs and and the the constant constant and and misguided blame blame attached attached to them to them 

by the by the real real culprits culprits (politicians) will will drive drive the the best best ones ones into into greater greater remunerated 

areas areas such such as hedge as hedge funds, funds, private private equity equity funds, funds, asset asset management etc”. etc”. 

29. 29. Reliance on on third parties (-) (-) 

Although the the advantages of outsourcing of are are much-debated, this this did did not not emerge emerge as a as a 

high high risk risk issue. issue. Most Most respondents thought thought that that outsourcing was was worthwhile and and 

generally well-managed by by the the banks, banks, though though recession may may make make that that more more 

difficult. difficult. A risk A risk manager manager at one at one of the of the large large Swiss Swiss banks banks said said banks banks were were now now quite quite 

reliant reliant on third on third parties, parties, “but “but generally governance of these of these is well is well policed”. policed”. 

Outsourcing 

is is a well a well 

managed risk risk 

If there If there was was a concern, a concern, it lay it lay in the in the area area of reputation. of Banks Banks with with distant distant call call centres centres 

risked risked alienating their their customers – and – and some some were were already already repatriating them them for that for that 

reason. reason. Stefan Stefan Wasilewski, managing partner partner of FinaXiom of Services, Services, said said that that 

“outsourcing carries carries all of all the of the reputation risks, risks, but but none none of the of the real real management 

control control and and should should only only be be done done with with care”, care”, and and a central a central banker banker said said that that 

“weakening their their link link to customers is not is not a good a good way way to run to run a sustainable a business”. 

A regulator A regulator warned warned that that “concentration of risk of risk in India in India for for call call centre centre and and software software 

development has has become become an an issue issue for for banks banks and and service service industries, just just as as 

concentration of manufacturing of has has occurred occurred in China. China. Such Such concentrations typically typically 

backfire backfire at some at some point point time”. in time”. 

30. 30. Payment systems (29) (29) 

Payment Payment systems systems are are the the boring boring part part of banking, of banking, and and long long may may they they stay stay that that way. way. 

This This lowest lowest of banking of banking risks risks has has caused caused little little trouble trouble in recent in recent years, years, and and is not is not 

expected expected to, though to, though one one can can never never be sure. be sure. 

“There “There is no is reason no reason to think to think payment payment systems systems are are a vector a vector for for spreading instability. 

They They have have performed well well through through the the crisis crisis so far,” so far,” said said Kathleen Kathleen Tyson Tyson Quah, Quah, 

managing director director of of Absalon Absalon Project, Project, and and a specialist a in financial financial market market 

infrastructure. Even Even so, so, respondents had had their their worries. worries. One One was was the the impact impact of a of a 

eurozone break-up break-up on the on the Single Single Euro Euro Payments Area Area (SEPA), (SEPA), something for which for which 

there there was was no precedent. no How How would would the the markets markets manage manage if the if the system system had had to be to shut be shut 

down down for several for several days days to allow to allow currency currency realignments to take to take place? place? 

31 31 




The financial 

plumbing has 

stood up up well –– 

so so far far 

Another is is the the growing concentration of of business through the the centralised counter 

parties (CCPs) that that guarantee trades on on derivative exchanges. Although CCPs have have 

also also held held up up well, well, many respondents saw saw them as as potential weak links links in a stressed a system. Dennis Cox, Cox, CEO CEO of of Risk Risk Reward Limited, said said that that the the development of of 

central counterparties “creates a concentration a of of risk risk which runs runs exactly counter to to 

everything else else that that we we are are hearing the the regulators want want to to achieve – – and and will will result 

in increased unhedged risk risk and and systemic weakness”. 

Generally, counterparty risk risk is perceived to to be be growing – – a natural a consequence of of 

weakened banks. One One banker said said that that “the “the introduction of of more centralised clearing 

has has simply transferred the the risk risk of of counterparty loss loss to to a new a new risk risk node. I would I not not 

be be surprised to to see see a clearing a house need need government support at at some stage”. 

32 32 


C S F I / New York CSFI Banking Banana Skins 2012 

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 

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

The Top Ten since 1996 show how concerns have changed over 15 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 2010 survey showed a preoccupation with the crash aftermath: lingering debt and 

funding problems, but also new concerns about the fragility of the world economy and the 

intrusion of government into the banking sector, many of which have materialised in the present 

survey. 

33 



APPENDIX: The questionnaire 

CSFI 

CENTRE FOR THE STUDY OF FINANCIAL INNOVATION 

CSFI 

5, Derby Street, London W1J 7AB, UK 

Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190 

CENTRE FOR THE STUDY OF FINANCIAL INNOVATION 

5, Derby Street, London W1J 7AB, UK 

Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190 

Banking Banana Skins 2011 

Each year we ask senior bankers and close observers of the financial scene to describe their main worries about the 

banking industry as they look ahead. Banking We'd be very Banana grateful if you Skins would take 2011 a few minutes to fill out this form, and 

return it to us by December 12th 

Each year we ask senior bankers and close observers of the financial scene to describe their main worries about the 

CSFI, 5 Derby Street, London W1J 7AB, UK 

banking industry as they look ahead. We'd be very grateful if you would take a few minutes to fill out this form, and 

Tel: +44 (0) 20 7493 0173 

return it to us by December 12th 

Fax: +44 (0) 20 7493 0190 

CSFI, 5 Derby Email: Street, info@csfi.org.uk 

London W1J 7AB, UK 

Tel: +44 (0) 20 7493 0173 

Fax: +44 (0) 20 7493 0190 

Name 

Email: info@csfi.org.uk Position 

Institution 

Name 

Institution 

Country 

Position 

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

Country 

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

Question 1. Please describe your main concerns about the safety of financial institutions (both individual 

institutions and the system as a whole) as you look ahead over the next 2-3 years. 

Question 1. Please describe your main concerns about the safety of financial institutions (both individual 

institutions and the system as a whole) as you look ahead over the next 2-3 years. 

Please turn over 

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

Banking Banana Skins 2011 Page 1


Question Question 2. Here are 2. some Here areas some of risk areas which of have risk which been attracting have been attention. attracting Please attention. score Please them score on a scale them of on a scale of 

5 to 1 where 55 to means 1 where you 5 see means a high you risk see to a banks high risk and to 1 banks low and risk. 1 Use a low the risk. column Use on the the column right on to add the right comments. to add comments. 

Add more risks Add at more the bottom risks at if the you bottom wish. if you wish. 

Risk 

5=high 

1=low 

Back office: Back How office: big a source How big of a risk source are banks' of risk are banks' 

operations, operations, for example for the example complexity the of complexity their of their 

footprints, their footprints, operating their models, operating or their models, ability or to their ability to 

introduce new introduce products? new products? 

Risk 

5=high 

1=low 

Comment Comment 

Business continuation: Business continuation: How likely is How it that likely is it that 

inadequate inadequate recovery and recovery resolution and plans resolution will put plans will put 

banks at risk? banks at risk? 

Capital availability: Capital availability: To what extent To what is the extent is the 

availability of availability affordable of capital affordable a potential capital source a potential source 

of risk to banks? of risk to banks? 

Corporate governance: Corporate governance: How likely is How it that likely is it that 

weakness at weakness board level at will board lead level to will lead to 

poor oversight poor and oversight control? and control? 

Credit risk: Credit How great risk: is How the great risk that is the banks risk will that banks will 

suffer losses suffer through losses loan through loan 

default by sovereign default by borrowers, sovereign companies borrowers, and companies and 

consumers? 

consumers? 

Criminality: Criminality: How exposed How are exposed banks to are risk banks in to risk in 

areas such as areas money such laundering, as money laundering, tax evasion tax and evasion and 

theft of confidential theft of confidential information? information? 

Derivatives: Derivatives: What is the What potential is the for potential banks to for banks to 

suffer losses suffer through losses their through their 

dealings in derivatives dealings in and derivatives other exotic and other products? exotic products? 

Emerging markets: Emerging How markets: big a source How big a source 

of risk is potential of risk volatility is potential in emerging volatility in markets? emerging markets? 

Fraud: What Fraud: is the What risk of is banks the risk being of banks defrauded being defrauded 

by clients or by staff, clients other or than staff, rogue other traders? than rogue traders? 

Hedge funds: Hedge How funds: strong How a threat strong do hedge a threat funds do hedge funds 

and other “shadow” and other banking “shadow” institutions banking pose institutions to pose to 

banks, for example banks, for as example competition as competition or sources of or sources of 

volatility? volatility? 

Please turn Please over turn over 


Banking Banana Banking Skins Banana 2011 Skins 2011 Page 2 

Page 2


High dependence on technology: How likely is it 

that banks could be damaged by internal 

technology failure? 

Human resources: How likely is that banks will 

have difficulty attracting and retaining talent in the 

present environment? 

Liquidity: What is the risk that banks will 

encounter liquidity problems? 

Macro-economic environment: To what extent 

does the current macro-economic environment 

present a threat to the banking sector? 

Management incentives: How big a source of risk 

are incentive structures to banking soundness and 

reputation? 

Markets: How likely is it that banks will 

lose money because of turbulence in the following 

key markets: 

- Equities? 

- Currencies? 

- Commodities? 

- Interest rates? 

Payment systems: How likely is a major failure in 

bank payment systems? 

Political interference: How great is the risk that 

political pressure will damage banks, for example 

through interference in management and lending 

policies, or by imposing additional mandates and 

costs? 

Please turn over 

CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 35 



Pricing of risk: How likely are banks to misprice 

risk due to competitive or other pressures? 

Profitability: What is the risk that banks will be 

unable to maintain adequate profitability in current 

operating conditions? 

Reliance on third parties: To what extent is the 

outsourcing or off-shoring of activities a potential 

source of risk to banks? 

Quality of risk management: How likely is it that 

banks will incur losses as a result of inadequate 

risk management? 

Regulation: To what extent could the current wave 

of regulation have damaging effects on banks? 

Restructuring and change management: How 

likely is it that banks will incur losses as they shed, 

divide or acquire businesses to meet the new 

economic and regulatory environment? 

Rogue trader: How likely are banks to 

be hit by unauthorised trading? 

Sales and business practices: How strong is the 

risk that banks will incur losses as a result of poor 

sales, customer servicing and other conduct of 

business practices? 

Sustainability: How likely is it that banks will suffer 

from weaknesses in the area of 

the environment, ethics, reputation etc.? 

Question 3. How well prepared do 

you think banks are to handle the risks you 

have identified, where 5 = well 

and 1 = poorly? 

Thank you 



104 Banking Banana Skins 2012 

February 2012. ISBN 978-0-9570895-1-8 

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By Tim Congdon. February 2009. ISBN 978-0-9561904-1-3. 

82. “INSURANCE BANANA SKINS 2009: the CSFI survey of the risks facing insurers.” 

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81. “BANKING BANANA SKINS 2008: an industry in turmoil.” 

The CSFI’s regular survey of banking risk at a time of industry turmoil. 

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By David Lascelles. March 2008. ISBN 978-0-9551811-7-7. 

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78. “A TOUGH NUT: Basel 2, insurance and the law of unexpected consequences.” 

By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3. 

77. “WEB 2.0: how the next generation of the Internet is changing financial services.” 

By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6. 

76. “PRINCIPLES IN PRACTICE: an antidote to regulatory prescription.” 

The report of the CSFI Working Group on Effective Regulation. June 2007. ISBN 978-0-9551811-2-2. 

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75. “INSURANCE BANANA SKINS 2007: a survey of the risks facing the insurance industry.” 


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74. “BIG BANG: two decades on.” 

City experts who lived through Big Bang discuss the lasting impact of the de-regulation of London’s securities markets 

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73. “BANKING BANANA SKINS 2006” 

The latest survey of risks facing the banking industry 


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An industry insider defends finite re-insurance as a rational response to irrational demands. 

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71. “SURVIVING THE DOG FOOD YEARS: solutions to the pensions crisis.” 

New thinking in the pensions area (together with a nifty twist by Graham Cox). 

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70. “NOT WAVING BUT DROWNING: over-indebtedness by misjudgement.” 

A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market. 

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69. “BANANA SKINS 2005” 

Our latest survey of where bankers, regulators and journalists see the next problems coming from. 


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68. “BETTING ON THE FUTURE: online gambling goes mainstream financial.” 

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67. “REGULATION OF THE NON-LIFE INSURANCE MARKET: why is it so damn difficult?” 

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66. “COMPANIES CANNOT DO IT ALONE: an investigation into UK management attitudes to Company Voluntary Arrangements.” 

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64. “BANKING BANANA SKINS 2003: what bankers were worrying about in the middle of 2003.” 


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63. “THE GLOBAL FX INDUSTRY: coping with consolidation.” 

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62. “PENSIONS IN CRISIS? RESTORING CONFIDENCE: a note on a conference held on February 26, 2003.” 

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59. “A NEW GENERAL APPROACH TO CAPITAL ADEQUACY: a simple and comprehensive alternative to Basel 2.” 

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57. “CAPITALISM WITHOUT OWNERS WILL FAIL: a policymaker’s guide to reform.” 

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56. “THE FUTURE OF FINANCIAL ADVICE IN A POST-POLARISATION MARKETPLACE.” 

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55. “CLEARING AND SETTLEMENT: monopoly or market?” 

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54. “WAITING FOR ARIADNE: a suggestion for reforming financial services regulation.” 

Kevin James. July 2002. ISBN 0-9543145-0-6 

53. “HARVESTING TECHNOLOGY: financing technology based SMEs in the UK.” 

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52. “SINGLE STOCK FUTURES: the Ultimate Derivative.” 

By David Lascelles. February 2002. ISBN 0-9543144-5-2 

51. “BANKING BANANA SKINS 2002: a CSFI Survey of Risks Facing Banks.” 

What bankers are worrying about at the beginning of 2002. 


By David Lascelles. February, 2002. ISBN 0-9543144-5-1 

50. “BUMPS ON THE ROAD TO BASEL: an anthology of views on Basel 2.” 

Edited by Andrew Hilton. January 2002. ISBN 0-9543144-5-0 

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49. “THE SHORT-TERM PRICE EFFECTS OF POPULAR SHARE RECCOMENDATIONS.” 

By Bill McCabe. September 2001. ISBN 0-9543144-4-9 

48. “WAKING UP TO THE FSA: how the City views its new regulator.” 

By David Lascelles. May 2001. ISBN 0-9543144-4-8 

47. “BRIDGING THE EQUITY GAP: a new proposal for virtual local equity markets.” 

By Tim Mocroft. January 2001. ISBN 0-9543144-4-7 

46. “iX: better or just bigger?” 

By Andrew Hilton and David Lascelles. August 2000. ISBN 0-9543144-4-6 

45. “BANKING BANANA SKINS 2000: the CSFI’s latest survey of what UK bankers feel are the biggest challenges facing them.” 

By David Lascelles. June 2000. ISBN 0-9543144-4-5 

44. “INTERNET BANKING: a fragile flower.” 

By Andrew Hilton. April 2000. ISBN 0-9543144-4-4 

43. “REINVENTING THE COMMONWEALTH DEVELOPMENT CORPORATION UNDER PUBLIC-PRIVATE PARTNERSHIP.” 

By Sir Michael McWilliam. March 2000. ISBN 0-9543144-4-3 

42. “IN OR OUT: maximising the benefits/minimising the costs of (temporary or permanent) non-membership of EMU.” 

Various. November 1999. ISBN 0-9543144-4-2 

41. "EUROPE’S NEW BANKS: the non-banks phenomenon.” 

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40. “A MARKET COMPARABLE APPROACH TO THE PRICING OF CREDIT DEFAULT SWAPS.” 

By Tim Townend. October 1999. ISBN 0-9543144-4-0 

39. “QUANT AND MAMMON: meeting the City’s requirements for post-graduate research and skills in financial engineering.” 

By David Lascelles. April 1999. ISBN 0-9543144-3-9 

38. “PSYCHOLOGY AND THE CITY: applications to trading, dealing and investment analysis.” 

By Denis Hilton. April 1999. ISBN 0-9543144-3-8 

37. “LE PRIX DE L’EUROPE: competition between London, Paris and Frankfurt.” 

By David Lascelles. February 1999. ISBN 0-9543144-3-7 

36. “THE INTERNET IN TEN YEARS’ TIME: a CSFI survey.” 

Various. November 1998. ISBN 0-9543144-3-6 

35. “CYBERCRIME: tracing the evidence.” 

By Rosamund McDougall. September 1998. ISBN 0-9543144-3-5 

34. “THE ROLE OF MACRO-ECONOMIC POLICY IN STOCK RETURN PREDICTABILITY.” 

By Nandita Manrakhan. August 1998. ISBN 0-9543144-3-4 

33. “MUTUALITY FOR THE 21ST CENTURY.” 

By Rosalind Gilmore. July 1998. ISBN 0-9543144-3-3 

32. “BANKING BANANA SKINS” 

The fifth annual survey of possible shock to the system. 

By David Lascelles. July 1998. ISBN 0-9543144-3-2 

31. “EMERALD CITY BANK: banking in 2010.” 

Various. March 1998. ISBN 0-9543144-3-1 

30. “CREDIT WHERE CREDIT IS DUE: bringing microfinance into mainstream.” 

By Peter Montagnon. February 1998. ISBN 0-9543144-3-0 

29. “THE FALL OF MULHOUSE BRAND.” 

By David Shirreff. December 1997. ISBN 0-9543144-2-9 

28. “CALL IN THE RED BRACES BRIGADE: the case for electricity derivatives.” 

Ronan Parker and Anthony White. November 1997. ISBN 0-9543144-2-8 

27. “FOREIGN CURRENCY EXOTIC OPTIONS.” 

A trading simulator for innovative dealers in foreign currency (with disc). 

By Stavros Pavlou. October 1997. ISBN 0-9543144-2-7 

26. “BANKING BANANA SKINS:1997.” 

The latest survey showing how bankers might slip up over the next two to three years. 

By David Lascelles. April 1997. ISBN 0-9543144-2-6 

25. “THE CRASH OF 2003: an EMU fairy tale.” 

By David Lascelles. December 1996. ISBN 0-9543144-2-5 

24. “CENTRAL BANK INTERVENTION: a new approach.” 

New techniques for managing exchange rates. 

By Neil Record. November 1996. ISBN 0-9543144-2-4 

23. “PEAK PRACTICE: how to reform the UK’s regulatory system.” 

By Michael Taylor. October 1996. ISBN 0-9543144-2-3 

22. “WELFARE:A RADICAL RETHINK: the Personal Welfare Plan.” 

Andrew Dobson. May 1996. ISBN 0-9543144-2-2 

21. “BANKING BANANA SKINS III” 

By David Lascelles. March 1996. ISBN 0-9543144-2-1 

20. “TWIN PEAKS: a regulatory structure for the new century.” 

Michael Taylor. December 1995. ISBN 0-9543144-2-0 

£25/$40 

£25/$40 

£25/$40 

£25/$40 

£25/$40 

£25/$40 

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£6/$10 

£25/$40 

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£25/$40 

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£25/$40 

£25/$40

19. “OPTIONS AND CURRENCY INTERVENTION.” 

A radical proposal on the use of currency option strategies for central banks. 

Charles Taylor. October 1995. ISBN 0-9543144-1-9 

18. “THE UK BUILDING SOCIETIES: do they have a future?” 

A collection of essays by Angela Knight; Alistair Darling, Peter White, Peter Birch, Bert Ely and Karel Lannoo 

September 1995. ISBN 0-9543144-1-8 

17. “THE CITY UNDER THREAT.” 

A leading French journalist worries about complacency in the City of London. 

By Patrick de Jacquelot. August 1995. ISBN 0-9543144-1-7 

16. “BRINGING MARKET-DRIVEN REGULATION TO EUROPEAN BANKING: a proposal for 100 per cent cross-guarantees.” 

By Bert Ely. July 1995. ISBN 0-9543144-1-6 

15. “ECONOMIC AND MONETARY UNION STAGE III: the issues for banks.” 

By Malcolm Levitt. May 1995. ISBN 0-9543144-1-5 

14. “AN ENVIRONMENTAL RISK RATING FOR SCOTTISH NUCLEAR.” 

Various. March 1995. ISBN 0-9543144-1-4 

13. “BANKS AS PROVIDERS OF INFORMATION SECURITY SERVICES.” 

By Nick Collin. February 1995. ISBN 0-9543144-1-3 

12. “LIQUIDITY RATINGS FOR BONDS.” 

By Ian Mackintosh. January 1995. ISBN 0-9543144-1-2 

11. “IBM/CSFI PRIZE: technology and financial services.” 

Simon Moorhead and Graeme Faulds. December 1994. ISBN 0-9543144-1-1 

10. “BANKING BANANA SKINS Il” 

Lessons for the future from the last banking crisis. 

Sir Kit McMahon, Sir Nicholas Goodison, Bruce Pattullo, John Melbourn and Philippa Foster-Back. 

November 1994. ISBN 0-9543144-1-0 

9. “THE EURO-ARAB DILEMMA: harnessing public and private capital to generate jobs and growth in the Arab world.” 

By Jacques Roger-Machart. October 1994. ISBN 0-9543144-0-9 

8. “A NEW APPROACH TO SETTING CAPITAL REQUIREMENTS FOR BANKS.” 

Charles Taylor. July 1994. ISBN 0-9543144-0-8 

7. “BANKING BANANA SKINS” 

The first in a periodic series of papers looking at where the next financial crisis is likely to spring from. 

By Martin Mayer, John Plender, Brooke Unger, Robin Monro-Davies and Keith Brown. June 1994. ISBN 0-9543144-0-7 

6. “UK FINANCIAL REGULATION: a blueprint for change.” 

Andrew Hilton (prepared pseudononymously by a senior commercial banker). May 1994. ISBN 0-9543144-0-6 

5. “THE IBM DOLLAR.” 

A proposal for the wider use of “target” currencies. 

By Edward de Bono. March 1994. ISBN 0-9543144-0-5 

4. “ELECTRONIC SHARE DEALING FOR THE PRIVATE INVESTOR.” 

By Paul Laird. January 1994. ISBN 0-9543144-0-4 

3. “RATING ENVIRONMENTAL RISK.” 

By David Lascelles. December 1993. ISBN 0-9543144-0-3 

2. “DERIVATIVES FOR THE RETAIL CLIENT.” 

By Andrew Dobson. November 1993. ISBN 0-9543144-0-2 

1. “FINANCING THE RUSSIAN SAFETY NET.” 

Peter Ackerman and Edward Balls. September 1993. ISBN 0-9543144-0-1 

£20/$35 

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£20/$35 

£40/$65 

Regulation papers 

4. “EMBRACING SMOKE: the Internet and financial services regulation.” 

By Joanna Benjamin and Deborah Sabalot. June 1999 

3. “INDEPENDENCE AND ACCOUNTABILITY: tweaking the Financial Services Authority.” 

By Robert Laslett and Michael Taylor. June 1998. 

2. “FINANCIAL EDUCATION AND THE ROLE OF THE REGULATOR: the limits of caveat emptor.” 

By Victoria Nye. May 1998 

1. “ACCEPTING FAILURE.” 

By David Lascelles. February 1998 

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£6/$10 

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Other Reports 

“THE NEW WORLD OF EUROPEAN E-FINANCE.” 

Various. December 2002. ISBN 0-9543145-9-X 

“The Internet and Financial Services: a CSFI report.” 

June 1997. (Available from City and Financial. To order a copy, tel: 01483 720 707; fax: 01483 740 603) 

£40/$65/€65 

£45

Sponsorship 

The CSFI receives general support from many public and private institutions, and that support takes different forms. 

The Centre currently receives financial support from; inter alia: 

Ruffer 

Citigroup 

Ernst & Young 

Fitch Ratings 

Aberdeen Asset Management 

ABI 

ACCA 

Accenture 

Arbuthnot 

Aviva 

Bank of England 

Chartered Insurance Institute 

City of London 

Deloitte 

Eversheds 

Fidelity International 

Finance & Leasing Association 

FOA 

FRC 

FSA 

Gatehouse Bank 

ICMA 

JP Morgan 

PwC 

HSBC 

Jersey Finance 

KPMG 

LCH.Clearnet 

Lloyds Banking Group 

Logica 

Man Group plc 

Morgan Stanley 

Nomura Institute 

PA Consulting 

Royal Bank of Scotland 

Santander 

The Law Debenture Corporation 

Thomson Reuters 

TPG Design 

UK Payments (APACS) 

Z/Yen 

Zurich 

Absolute Strategy 

ACT 

AFME 

Alpheus Solutions 

Bank of Italy 

Bank of Japan 

BCM International Regulatory Analytics LLC 

Brigade Electronics 

BVCA 

Chown Dewhurst 

CISI 

FairBanking Foundation 

FinaXiom 

Greentarget 

HM Treasury 

Hume Brophy 

Intrinsic Value Investors 

Investment Management Association 

Kreab Gavin Anderson 

LandesBank Berlin 

Lansons Communications 

LEBA and WMBA 

Lending Standards Board 

Lombard Street Research 

MacDougall Auctions 

Miller Insurance Services 

Nabarro 

NM Rothschild 

Record Currency Management 

RegulEyes 

Risk Reward 

Skadden, Arps 

SWIFT 

Taiwan FSC 

The Share Centre 

THFC 

WDX Organisation 

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

- Clifford Chance - NERC 

- Edwin Coe - NESTA 

- Financial Times - Promontory 

- GISE AG - SJ Berwin 

- ifs School of Finance - Standard Chartered 

- Linklaters LLP - Taylor Wessing 

- Hogan Lovells - Macquarie Group 

The Centre has received special purpose funding from: 

- CGAP and Citi (for Microfinance Banana Skins); 

- PwC (for Banking Banana Skins and Insurance Banana Skins); and 

- Euro IRP (for Has independent research come of age?) 

UK £25 

US $45 

€35 

CSFI © 


In addition, it has set up the following fellowship programmes: 

- the DTCC/CSFI fellowship in Post-Trade Architecture; 

- the VISA/CSFI fellowship in Identity in Financial Services; and 

- the DfID/Citi/CSFI fellowship in Development. 

Registered Charity Number 1017353 

Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE 

CSFI Registered in England and Wales limited by guarantee. Number 2788116

Banking Banana Skins 2012 - PwC

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