Banking Banana Skins 2015 The CSFI survey. of bank risk. Recovery under threat CSFI. Centre for the Study of Financial Innovation

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1 Banking Banana Skins 2015 The CSFI survey of bank risk Recovery under threat CSFI Centre for the Study of Financial Innovation

2 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 Sir Brian Pearse (Chairman) David Lascelles Sir Malcolm Williamson Staff Director Andrew Hilton Co-Director Jane Fuller Senior Fellow David Lascelles Programme Coordinator Harry Atkinson Governing Council Sir Malcolm Williamson (Chairman) Geoffrey Bell (NY) Rudi Bogni Philip Brown Abdullah El-Kuwaiz Prof Charles Goodhart John Heimann (NY) John Hitchins Rene Karsenti Henry Kaufman (NY) Sir Andrew Large David Lascelles John Plender David Potter Belinda Richards Mark Robson David Rule Carol Sergeant Sir Brian Williamson Peter Wilson-Smith CSFI publications can be purchased through our website or by calling the Centre on +44 (0) Published by Centre for the Study of Financial Innovation (CSFI) info@csfi.org Web: ISBN: Printed in the United Kingdom by Heron Dawson & Sawyer

3 CSFI / New York CSFI info@csfi.org Web:

4 C S F I / New York CSFI NUMBER ONE HUNDRED AND TWENTY ONE DECEMBER 2015 Preface First of all, the CSFI must thank PwC for its continuing support of our Banana Skins reports (both banking and insurance). This is the twelfth in a series of Banking Banana Skins that goes back to 1996 when poor management, EMU turbulence and rogue trader vied for top spot. We appreciate the financial help that PwC provides and also the wider distribution of the questionnaire through its own global network. Equally, we also appreciate the fact that PwC lets the chips fall where they may; the results (and the editorialising) are strictly the responsibility of the CSFI. Second, my thanks must go to the two authors David Lascelles (the CSFI s Senior Fellow and the Centre s cofounder) and Keyur Patel. BBS is a major piece of work, and I am grateful for all the time, effort and judgement they put into it. That said, I find this year s results more puzzling than usual particularly the finding that the top risk is the macroeconomic environment (which is actually seen as a bigger threat than the top risk in 2014). True, there has been a great deal of attention recently on China s economic slowdown but that is not new. And the US/UK recovery, in particular, seems to be consolidating. I surmise that (although we were very clear as to what we meant by the individual risks we identified) there was a fair amount of conflation in respondents minds the macroeconomic environment with credit risk, risk pricing and interest rates, for instance. Equally, my guess is that, for many respondents, criminality and technology risk overlapped which would make cyber risk an even more pressing concern than this year s report suggests it is. The point is that, throughout this year s survey, there are highly suggestive findings that one can plausibly agree or disagree with. I am (for instance) surprised that, in a regulatory world dominated by the demands of TLAC, respondents are so relaxed about capital availability. I am also somewhat surprised that concerns over regulation fell this year (albeit only to No 3), when signs of regulatory herding (ie a lack of diversity) abound and when banks still face massive financial retribution for their post-2007/08 sins. But that s what the BBS survey is all about. You don t have to agree or to believe in the salience of the risk landscape exactly as painted by respondents. Rather, BBS is intended to make the reader stop and think and, perhaps, to adjust his or her behaviour accordingly. By itself it won t protect against a banking crisis, but it can at least provoke a discussion that might protect an individual institution from leaping over the cliff with the rest of the lemmings. Andrew Hilton Director CSFI CSFI / New York CSFI info@csfi.org Web: 1

5 Sponsor s foreword Welcome to Banking Banana Skins 2015, a unique survey of the risks facing the industry, which has been produced by the CSFI in association with PwC. We are delighted to continue our support for this initiative. The Banana Skins reports provide highly regarded insight to the changing risk concerns of boards and senior management, and how these perceptions change over time. Many of you will be comparing the industry-wide findings against your own assessment of the current and emerging risk environment. The banking industry is under attack from many angles, not just from traditional risks but also new uncertainties. It is not surprising that in 2015, uncertainties in the macro-economic environment have risen to be the top risk, rising from No. 3 in Despite prudential reforms, banks remain vulnerable to high debt levels, future interest rates, weakness in China and other emerging markets, and softening commodity prices. Lower growth rates, together with regulatory reforms will put pressure on banks to manage returns. The sharpest rise in concern in 2015 was about criminality (including the risks to banks in areas such as money laundering, tax evasion and cyber attack) which rose from No. 9 in 2014 to No. 2 in This risk coupled with continued concern on technology risk (No. 4) where underinvestment and obsolescence, as well as the boom in new fintech present major challenges to banks. Criminality and technology risk are becoming increasingly concerns of banks given the rise in new competitors who are challenging traditional ways of doing things and operate using more nimble systems and lower overheads. Traditional bank earnings models are starting to be threatened as these competitors chip away at many traditional way of doing things. To help them improve margins, banks are experimenting with new industry models which leverage on technology and focus more on customer centricity and less on products; however this could expose them to even higher risks in the areas of cyber crime and financial terrorism. Not surprising, regulation remains the No. 3 Banana Skin for banks in Whilst banks recognise the need for tougher controls, many question their cost and effectiveness. Banks are not only bearing the direct costs of regulation new capital and liquidity requirements, restructuring costs, the impact of market conduct requirements (including potential regulatory fines), higher costs of compliance, and higher costs of customer acquisition; but also the cost of greater management time to re-engineer processes, change culture and increase compliance efficiency. Industry margins are being impacted. We would like to thank all the participants in the survey for sharing their valuable insights and thank the CSFI for the richness of insight and perceptive comment in this report. I trust you find Banking Banana Skins 2015 useful and thought-provoking. If you have any feedback or would like to discuss any of the issues raised in more detail, please do not hesitate to contact me. Dominic Nixon Global FS Risk Leader, PwC Singapore dominic.nixon@sg.pwc.com 2 CSFI / New York CSFI info@csfi.org Web:

6 Contents About this survey...4 Summary...5 Who said what...9 Preparedness...11 The Banana Skins...12 Appendix 1: A closer look at the numbers...34 Appendix 2: The changing face of risk This report was written by David Lascelles and Keyur Patel CSFI / New York CSFI info@csfi.org Web: 3

7 About this survey This survey describes the risks currently facing the global banking industry, as seen by a wide range of bankers, banking regulators and close observers of the banking scene around the world. The survey was carried out in September and October 2015, and received 672 responses from individuals in 52 countries. The questionnaire was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the financial system over the next 2-3 years. In the second, they were asked to score a list of potential risks, or Banana Skins, selected by a CSFI/PwC panel. In the third, they were asked to rate the preparedness of financial institutions to handle the risks they identified. Replies were confidential, but respondents could choose to be named. The breakdown of respondents by type was: 38% 37% Bankers Risk managers and regulators Observers 25% The breakdown by countries was as follows: Argentina 1 Hong Kong 14 Portugal 8 Australia 13 India 5 Russia 12 Austria 2 Indonesia 19 Saudi Arabia 2 Azerbaijan 4 Iran 2 Singapore 23 Belgium 24 Ireland 2 Slovakia 11 Brazil 30 Italy 1 South Africa 14 Canada 34 Japan 5 Spain 3 Cayman Islands 11 Luxembourg 28 Sweden 3 China 34 Malaysia 12 Switzerland 2 Croatia 7 Malta 1 Taiwan 2 Cyprus 1 Mexico 40 Thailand 3 Czech Republic 5 Netherlands 9 Turkey 74 Denmark 1 New Zealand 25 Uganda 1 Dominican Rep. 1 Nigeria 12 UK 113 France 4 Panama 1 UAE 1 Germany 5 Peru 8 Uruguay 1 Greece 7 Philippines 4 USA 20 Poland 7 4 CSFI / New York CSFI info@csfi.org Web:

8 Summary This report describes the the risk outlook for for the the banking industry in in the the final quarter of of 2015 a a time when the the global economy and its its banking system were in in the the advanced stages of of recovery from the the financial crisis, but but when concerns were growing about the the strength of of that recovery. Failure of of the global recovery is is the greatest risk The findings are are based on on responses from 672 bankers, regulators and close observers of of the the banking scene in in countries. In In the the opinion of of these respondents, the the greatest threat to to the the banking industry lies lies in in the the possibility that economic recovery will fail fail because of of the the huge - - and in in many cases rising - - weight of of debt in in all all the the main sectors: sovereign, corporate and consumer. There are are also strong concerns about economic weakness in in developing economies, and uncertainty surrounding central banks' monetary policies. A senior banking supervisor said: Higher indebtedness brings greater financial fragility. Regulators and banks have made some progress in in reducing leverage in in the the banking sector. But it it remains high nonetheless. And the the increasing indebtedness of of borrowers leaves banks vulnerable in in the the face of of economic shocks. Given such views, one of of the the strongest risks is is concern about the the quality of of banks' risk management, which rose from No in in 2014 to to No. 66 in in this survey. Although much work has has been done by by banks and their regulators to to strengthen risk controls, there is is a a sense that banks have still not not adequately addressed not not just the the scale of of risk but but also its its changing nature. Banking Banana Skins 2015 (2014 ranking in in brackets) 11 Macro-economic environment (3) (3) 22 Criminality (9) (9) 33 Regulation (1) (1) 44 Technology risk (4) (4) 55 Political interference (2) (2) 66 Quality of of risk management (11) 77 Credit risk (7) (7) 88 Conduct practices (16) 99 Pricing of of risk (6) (6) Business model (-) (-) Social media (19) Reputation (-) (-) Capital availability (10) Interest rates (12) Emerging markets (17) Shadow banking (20) Currency (22) Liquidity (15) Corporate governance (8) (8) Management incentives (21) Derivatives (18) Human resources (23) Reliance on on third parties (24) Sustainability (25) The changing nature of of risk is is summed up up by by the the sharp rise in in concern about criminality (up (up from No. 99 to to No. 2), 2), chiefly because of of the the alarming spread of of cyber-crime in in an an increasingly borderless market, particularly data theft. This is is closely associated with technology risk (No. 4) 4) where underinvestment and obsolescence, and banks' growing exposure to to competition from fintech companies, now present major challenges. CSFI / New York CSFI info@csfi.org Web: 5

9 Another Another strong strong riser in riser the in area the of area risk of management risk management is conduct is conduct practices practices (up from (up from No. 16 No. to 16 No. to 8) No. because 8) because of what of what is perceived is perceived to be to the be banks' the banks' failure failure to achieve to achieve culture culture change change in the in management the management of their of their business business practices practices despite despite strong strong regulatory regulatory pressure pressure and heavy and heavy fines. fines. One One banker banker described described unethical unethical business business practices practices as a perennial as a perennial risk [which] risk [which] won t won t go away go away as we as make we make money money out of out of people people who don't who don't pay money pay money back. back. Even Even so, reputation so, reputation risk risk did not did rank not rank as high as high as might as might be expected be expected (No. (No. 12) 12) because because of the of view the view that this that is this one is risk one to risk which to which there there is little is little downside. downside. Political Political interference interference banking banking is seen is to seen be to declining be declining (down (down from from No. 2 No. last 2 year last to year No. to 5) No. 5) and excessive and excessive regulation, regulation, long long a high-ranking a high-ranking risk, risk, slipped slipped from from the top the position top position last year last to year No. to 3. No. The 3. most The most threatening threatening riser in riser this in area this is area social is social media media (up from (up from No. 19 No. to 19 No. to 11) No. with 11) its with power its power to damage to damage bank bank reputations reputations with or with without or without sound sound evidence. evidence. Central Central banks banks will will make make sure sure banks banks have have enough enough liquidity A number A number of risks of risks which which were were associated associated with the with financial the financial crisis crisis have have continued continued to to recede. recede. Among Among them them are the are pricing the pricing of risk of (i.e. risk aggressive (i.e. aggressive under-pricing to achieve to achieve competitive competitive advantage) advantage) which which went went down down from from No. 6 No. to No. 6 to 9, No. the 9, availability the availability of of capital capital to strengthen to strengthen bank bank balance balance sheets sheets (down (down from from No. 10 No. to 10 No. to 13), No. and 13), and liquidity liquidity risk (down risk (down from from No.15 No.15 to No. to 18) No. because 18) because of the of commitment the commitment by central by central banks banks to keep to keep funding funding markets markets afloat. afloat. Interest Interest rate risk rate was risk also was low also at low No. at 14 No. 14 despite despite the long the long anticipated anticipated end to end quantitative to quantitative easing: easing: banks banks have have had plenty had plenty of of time to time prepare to prepare for it, for though it, though it will it be will a first be a time first experience time experience for the for industry the industry and its and its impact impact cannot cannot be predicted be predicted with any with certainty. any certainty. Two Two notable notable risers risers are emerging are emerging markets markets (up from (up from No. 17 No. to 17 No. to 15) No. where 15) where concern concern focuses focuses on the on prospects the prospects for China for China and the and impact the impact of weak of weak commodity commodity prices prices on a string on a string of dependent of dependent economies, economies, and shadow and shadow banking banking (up from (up from No. 20 No. to 20 to No. 16), No. the 16), unregulated the unregulated (and therefore (and therefore potentially potentially dangerous) dangerous) para-financial sector sector whose whose growth growth is seen is to seen be to fuelled be fuelled by excessive by excessive regulation regulation of mainstream of mainstream suppliers. suppliers. Institutional Institutional risks risks to banks to banks show show a mixed a mixed trend. trend. The good The good news news is that is the that risk the of risk of poor poor corporate corporate governance governance has fallen has fallen sharply sharply from from No. 8 No. to 8 No. to 19 No. following 19 following recent recent improvements, though though there there is a thread is a thread of concern of concern that boards that boards may no may longer no longer be physically be physically capable capable of staying of staying on top on of top issues of issues in their in their increasingly increasingly complex complex and and fast-moving fast-moving institutions. institutions. The bad The news bad news is that is concern that concern is rising rising over the over viability the viability of of bank bank business business models models (No. (No. 10) when 10) when changing changing structures, structures, technologies technologies and and markets markets demand demand constant constant adaptation. adaptation. Worthy Worthy of comment of comment among among the very the very low low ranked ranked risks risks sustainability, is or or environment-associated risk, risk, at No. at 24. No. Although 24. Although a number a number of respondents of respondents saw a saw a connection connection between between banks banks and their and their potentially potentially exposed exposed clients clients here, here, the broad the broad perception perception is that is banks that banks have have little to little fear to from fear from environmental threats, threats, and would, and would, in in any case, any case, be able be to able adapt. to adapt. 6 CSFI / New York CSFI info@csfi.org Web:

10 Risers and fallers The dramatic changes in the global banking industry are reflected in equally sharp shifts in risk perceptions. Here is a selection of risks whose ranking has altered markedly since Concern about the quality of banks' risk management is rising RISING RISKS Macro-economic environment: fears about the strength of the recovery Criminality: alarming rise in cyber crime and fraud. Conduct practices: lack of "culture change" in banks may be perpetuating bad old ways. Social media: the rising threat to bank reputations from popular electronic networks. FALLING RISKS Corporate governance: much work has been done to improve the way banks are run. Pricing of risk: A lull in "silly pricing" which may, however, be temporary. Capital availability: Plenty of capital available, particularly for those who don't need it. Liquidity: Central banks will ensure there are no funding crises. Derivatives: Trading of exotic products now under tighter control. Types of response A breakdown of responses by type shows that all major respondent groups (bankers, observers and risk managers) are strongly concerned about the state of the global economy and regulatory excess. Important points of difference come in their attitudes towards institutional risk. Non-banker respondents generally believe that banks are more vulnerable to operational risks such as criminality, technology, conduct practices and reputation than the bankers themselves where the focus is more on external pressures, such as political interference. A breakdown of responses by region shows that the macro-economic outlook dominates concerns around the world, except in North America where it ranks No. 2, possibly because of the stronger recovery in the US. The rising risks from criminality were the North Americans' top concern, and also ranked high in other regions. Otherwise there was a fairly strong global consensus that the main threats to banking safety come from areas such as technology risk, credit risk and conduct practices. Preparedness We asked respondents how well prepared they thought banks were to deal with the risks identified by the survey on a scale where 5=well prepared and 1=poorly prepared. The result was 3.13, slightly better than the 3.04 scored in 2014, and continuing a rising trend since the peak of the financial crisis. Bankers rated their preparedness higher than non-bankers. Geographically perceptions of preparedness were strongest in the Far East Pacific followed by North America and Europe. CSFI / New York CSFI info@csfi.org Web: 7

11 Banana Banana Skins Skins Index Index The Banana The Banana Skins Skins Index Index tracks tracks survey survey responses responses over over time time and can and be can read be as read an as an indicator indicator of changing of changing anxiety anxiety levels. levels. The upper The upper line shows line shows the average the average score score (out of (out of five) five) given given to the to top the risk, top and risk, the and bottom the bottom line shows line shows the average the average of all of the all risks. the risks. This This year, year, the top the risk top - risk macro-economic - risk - risk has - risen, has risen, but the but overall the overall trend, trend, as as shown shown by the by average the average of all of the all risks, the risks, extends extends the downward the downward path it path began it began in in However However overall overall anxiety anxiety is still is higher still higher than pre-crisis. than pre-crisis. 'Anxiety Index' Index' continues to to improve A closer A closer look look at the at numbers the numbers A closer In our look Banana at the Skins numbers. survey, In our respondents Banana Skins score survey, each risk respondents from 1-5, score where each 5 is the risk from most 1-5, severe. where A detailed 5 is the breakdown most severe. of A the detailed ratings breakdown is revealing of (see the ratings Appendix is 1). revealing We found: (see Appendix 1). We found: Anxiety Anxiety is growing is growing at the at top the of top the of rankings the rankings but receding but receding elsewhere. elsewhere. The The top cluster top cluster of risks of risks this year this were year were seen as seen more as more severe severe than in than 2014 in 2014 but from but from No. No. 5 downwards 5 downwards the reverse the reverse is true is true which which suggests suggests that outside that outside the main the main threats threats to to the industry, the industry, the picture the picture is improving. is improving. A regional A regional breakdown breakdown reveals reveals the same the same average average level level of anxiety of anxiety about about risks, risks, but widely but widely different different preparedness. Respondents Respondents from from the Far the East Far Pacific East Pacific were were much much more more optimistic optimistic about about their their ability ability to face to these face these risks risks than than those those from from Europe, Europe, with North with North America America in between. in between. The outlook The outlook of risk of managers risk managers is now is closer now closer to observers to observers than than bankers, bankers, both both in terms in terms of the of severity the severity of risks of risks faced faced and the and industry s the industry s ability ability to deal to with deal them. with them. In 2014 In 2014 risk managers risk managers were were more more closely closely aligned aligned with practitioners. with practitioners. Bankers Bankers and observers and observers disagree disagree most most about about the severity the severity of operating of operating and and governance governance risks, risks, the former the former group group being being much much less anxious less anxious than than the latter the latter about about threats threats that that individual individual institutions institutions have have more more influence influence over. over. Risk Risk managers managers tended tended to fall to in fall between. in between. 8 CSFI / New York CSFI info@csfi.org Web:

12 Who Who said said what what A breakdown A breakdown of responses of responses by type by type and and geography geography shows shows important important differences differences in in risk perceptions. risk Are Are bankers under-playing conduct of of business risk? risk? Bankers Bankers commercial and and investment bankers bankers 1 Macro-economic 1 envt. envt. Bankers Bankers see the see uncertain the uncertain economic economic outlook outlook 2 Regulation 2 as the as biggest the biggest threat threat to their to their prospects. prospects. But But they they continue continue to worry to worry about about risks risks that have that have 3 Political 3 Political interference dominated dominated their their thinking thinking since since the peak the peak of of 4 Criminality 4 the crisis, the crisis, those those of excessive of excessive regulation regulation and and 5 Technology 5 risk risk political political interference. Reputation Reputation risk risk also is also 6 Credit 6 Credit risk risk high high for them. for them. They They are increasingly are concerned concerned about about rising rising cyber cyber crime crime and the and the 7 Capital 7 Capital availability need need to stay to stay on top on of top technology of technology changes. changes. 8 Pricing 8 Pricing of risk of risk They They recognise recognise that the that quality the quality of their of their risk risk 9 Quality 9 Quality of risk of risk mgt. mgt. management needs needs improvement. A notable A notable Reputation absentee absentee from from the top the ten top is ten conduct is conduct of of business business risk which risk which came came No. 8 No. overall. 8 overall. Observers analysts, analysts, consultants, academics, service service providers 1 Macro-economic 1 envt. envt. Observers Observers of the of banking the banking industry industry took took a a 2 Criminality 2 strikingly strikingly different different view view of the of risk the risk outlook outlook from from bankers. bankers. While While they they shared shared 3 Regulation 3 bankers' bankers' top concerns top concerns with with the macroeconomyeconomy, they they placed placed a number a number of risks of risks at at the macro- 4 Technology 4 risk risk 5 Conduct 5 Conduct practices practices a higher a higher level, level, including including criminality, 6 Quality 6 Quality of risk of risk mgt. mgt. technology, conduct conduct practices, practices, quality quality of of risk management, risk reputation reputation and the and the 7 Political 7 Political interference viability viability of banking of banking models. models. These These are all are all 8 Reputation 8 close-to-home risks risks which which outsiders outsiders to the to the 9 Business 9 Business model model business business may may find find easier easier to evaluate. to evaluate Social Social media media Risk Risk managers people people who who work work in risk in risk management, including including regulators 1 Macro-economic 1 envt. envt. People People in the in business the business of risk of management risk 2 Regulation 2 shared shared the general the general concern concern about about the macroeconomieconomic outlook, outlook, and the and possibly the possibly the macro- 3 Criminality 3 damaging damaging effect effect of excessive of excessive regulation. regulation. But But 4 Technology 4 risk risk most most of the of risks the risks on their on their top list top are list ones are ones 5 Credit 5 Credit risk risk which which are within are within the banks' the banks' capacity capacity to to 6 Conduct 6 Conduct practices practices control: control: criminality, technology, credit, credit, the the 7 Political 7 Political interference pricing pricing of risk of and risk conduct and conduct practices, practices, even even the quality the quality of risk of management risk itself. itself. Of all Of all 8 Quality 8 Quality of risk of risk mgt. mgt. the major the major respondent respondent categories, categories, they they were were 9 Pricing 9 Pricing of risk of risk the most the most concerned concerned about about the future the future path path of of Interest Interest rates rates interest interest rates rates CSFI / New York CSFI info@csfi.org Web: 9

13 Europe 1 Macro-economic envt. Having contributed almost half of of this year s 2 Regulation responses, Europe s rankings largely mirrored the global results. Economic uncertainty, 3 Criminality especially in in the eurozone, led the list of of 4 Political interference concerns, but was closely followed by higher 5 Technology risk than average anxiety about public 6 Reputation environment risks: regulation, political interference and reputation. The related risks 7 Pricing of of risk around criminality and technology also 8 Conduct practices featured prominently. 9 Capital availability 10 Business model Far East Pacific 1 Macro-economic envt. The weakness of of China and concerns about 2 Technology risk the future of of quantitative easing meant the macro-economic environment was by some 3 Criminality distance viewed as as the biggest risk in in the Far 4 Credit risk East Pacific area. This was also the only 5 Conduct practices region to to have interest rates in in its top ten. 6 Quality of of risk mgt. Technology was another notable threat, including cybercrime and social media, while 7 Regulation conduct practices ranked higher than average. 8 Social media But there was less emphasis on public 9 Capital availability environment risks, including regulation. 10 Interest rates Criminality tops concerns in North America North America 1 Criminality The perceived threat of of cybercrime dominated 2 Macro-economic envt. the view in in North America, coming ahead of of concerns about the macro-economy, possibly 3 Regulation because of of the strength of of the US recovery. 4 Technology risk There was also an emphasis on competition 5 Political interference from non-traditional entrants to to the banking 6 Social media sector, with the risks around technology, business models and shadow banking all 7 Reputation making the top ten. On the other hand, risks 8 Business model related to to governance were rated lower than 9 Shadow banking the global average. 10 Conduct practices 10 CSFI / New York CSFI info@csfi.org Web:

14 Preparedness We asked We asked respondents respondents how well how prepared well prepared they thought they thought banks banks were were to handle to handle the the risks that risks lie that ahead, lie ahead, on a scale on a scale where where 5=well 5=well prepared prepared and 1=poorly and 1=poorly prepared. prepared. The The average average score score was 3.13, was 3.13, signalling signalling more more optimism optimism than the than 3.04 the score 3.04 score we recorded we recorded in in A breakdown A breakdown by type by type of respondent of respondent shows shows that bankers that bankers rated rated their their level level of of preparedness preparedness higher higher than risk than managers, risk managers, with observers with observers of the of industry the industry the most the most pessimistic pessimistic group. group. Total Total Bankers Bankers Risk managers Risk managers Observers Observers Banks Banks are are seen seen to be to be better better prepared A regional A regional breakdown breakdown reveals reveals that preparedness that preparedness was seen was to seen be better to better in the in Far the East Far East Pacific Pacific region region than Europe, than Europe, with North with North America America in between. in between. Far East Far Pacific East Pacific North North America America Europe Europe Respondents views views on preparedness on preparedness 2/5: The 2/5: size The and size complexity and complexity of the of largest the largest banks banks renders renders them them inflexible inflexible and 'too and 'too big to big govern' to govern' in such in such a dynamic a dynamic marketplace. marketplace. Significant Significant shocks shocks are inevitable are inevitable given given the plethora the plethora of risks of identified, risks identified, many many being being new challenges. new challenges. Observer, Observer, UK UK 2/5: The 2/5: biggest The biggest banks banks are bigger are bigger than in than in They They are almost are almost as complex as complex and and interconnected as in as in Leverage Leverage is lower is lower but remains but remains excessive. excessive. They They have have political political supporters supporters but the but public the public would would welcome welcome their comeuppance. their Not a Not good a good situation situation in an uncertain an uncertain world. world. Observer, Observer, USA USA 3/5: Many 3/5: Many areas areas of bank of risk bank management risk management have improved have improved for the for better, the better, which which has has made made the system the system sounder. sounder. However, However, new risks new are risks emerging are emerging for which for which there there is no is no historical historical experience experience that can that be can drawn be drawn on to on assist to assist with change. with change. Many Many new risks new risks remain remain relatively relatively unmanaged. unmanaged. Banker, Banker, New Zealand New Zealand 3/5: Banks 3/5: Banks are prepared prepared but the but lack the of lack a clear of a view clear of view upcoming of upcoming changes changes does not does not allow allow them to them fully to anticipate fully anticipate potential potential issues. issues. Risk manager, Risk manager, Luxembourg Luxembourg 4/5: With 4/5: With the exception the exception of new of technologies new technologies and cyber and cyber attacks, attacks, banks banks are well are well prepared. prepared. The new The rules new rules (Basel (Basel III) support III) support much much of this of preparation. this preparation. Banker, Banker, Mexico Mexico 4/5: Increased 4/5: Increased capital capital provision provision will help will on help some on some of the of endemic the endemic risks. risks. Banks Banks are are vulnerable vulnerable to their to own their political own political blind blind spots, spots, external external political political uncertainties, uncertainties, and and rapidly rapidly changing changing technologies. technologies. Observer, Observer, UK UK CSFI / New York CSFI info@csfi.org Web: 11

15 1. 1. Macro-economic environment (3) (3) The The risk risk that that economic conditions could damage banks, for for example through uncertain recovery or or the the growth of of asset bubbles The The uncertainties in in the the macro-economic environment present the the main threat to to the the recovery of of the the global banking system, according to to this this year's Banana Skins survey of of banking risk. risk. This marks a a change in in perceptions. In In 2014, macro-economic risk risk came No. No. 3 3 (behind excessive regulation and and political interference). Its Its move to to the the top top reflects growing concerns about the the weakness of of the the economic recovery and and its its apparent failure to to take take firm firm root. There are are many reasons for for this: this: the the high level of of debt debt that that persists in in all all the the main sectors around the the world: sovereign, corporate and and consumer, plus plus the the big big question mark over the the future of of quantitative easing and and interest rates. The The weakness of of China and and other emerging markets adds another layer of of risk. risk. Softening commodity prices and and the the growing threat of of disruption through cybercrime are are further factors. Global growth is is only happening because of of artificial conditions Concern about macro-economic risk risk was was particularly marked in in Europe because of of unsettled conditions in in the the eurozone, and and to to a a slightly lesser extent in in North America because of of the the QE QE question. Macro-economic risk risk was was also also the the top top concern for for all all types of of respondent (bankers, risk risk managers and and observers). The The fact fact that that many economies have now now returned to to positive growth does not not appear to to be be softening these concerns: indeed it it seems to to reinforce the the view that that growth is is only occurring because of of the the artificial conditions created by by abnormally low low interest rates, and and could easily fail fail as as asset bubbles burst at at a a time when central banks have run run out out of of monetary ammunition. Many respondents spoke of of the the global economy's vulnerability to to shocks of of both both the the financial and and natural kinds, and and the the prospects of of recession/deflation. A A senior credit analyst at at one one of of the the leading rating agencies said: The onset of of interest rate rate normalisation in in some countries, the the China slowdown and and the the unresolved Euromess all all have significant potential for for instability. Banks are are highly vulnerable to to all all these developments through their exposure to to debt debt and and their need for for liquidity. The The senior vice-president of of regulatory risk risk at at a a large Canadian bank warned that that the the low low rate, rate, low low growth environment is is going to to put put pressure on on banks to to either move out out the the risk risk curve, or or reduce their cost cost base which might make them less less able able to to mitigate/monitor the the risks they they are are taking. Similar messages came from many different points around the the world (see (see box). Not Not everyone was was pessimistic. A A number of of respondents felt felt that that while macroeconomic risk risk was was high, a a much-strengthened banking system could withstand the the shocks. A A senior US US banker said said that that slow growth and and volatile markets will will impact individual institutions, but but safety of of the the system is is unlikely to to be be a a concern. A A US US regulator added that that macro volatility is is always a a risk risk to to banks. Recent prudential reforms should help help to to temper these risks. 12 CSFI / New York CSFI info@csfi.org Web:

16 Russia. Negative trends in in the the economy [are] [are] leading to to a decline a in business activity and and in the in the financial condition of of economic entities. Thailand. Slow Slow recovery and and poor poor sentiment are are affecting almost all all levels levels of of business and and consumer [activity]. Potentially this this will will reduce growth [and [and affect affect the] the] profit profit margins of of banks and and financial institutions. South Africa. In In Africa Africa as as a whole, a the the state state of of the the economy - especially - in in countries very very dependent on one one particular industry - over - over the the next next couple of of years years will will be be precarious, and and strict strict monitoring needs to to [be [be applied]. Brazil. The The length of of the the economic recession that that Brazil Brazil is currently is undergoing is a is matter a of of major major concern for for banks in in general as as it will it will greatly impact the the performance of of the the loan loan portfolio. Azerbaijan. The The economy is strongly is dependent on on oil oil prices since since the the main main inflow inflow into into the the budget is from is from oil oil exports. The The low low level level of of oil oil prices is negatively is affecting the the overall economy and, and, in in turn, turn, the the business environment including banking Criminality (9) (9) The The risk risk to to banks in in areas such such as as money laundering, tax tax evasion and and cyber attack The The reason for for the the very very sharp sharp rise rise in in this this risk risk is clear: clear: cybercrime. Respondents in in North North America and and the the UK UK had had it as it as their their biggest concern, and and other other regions ranked it no it no lower lower than than No. No Cyber-attacks are are a a different animal Tax Tax evasion and and money laundering are are two two threats that that can can be be managed and and controlled. Cyber-attacks are are a different a animal, said said an an industry observer in in the the US. US. Simon Samuels, a banking a consultant in in the the UK, UK, said: said: We We may may at at some some point point see see a cyber-attack a so so powerful on on an an individual bank bank that that it has it has the the power to to bring bring down down the the institution, necessitating a state a state bailout. Respondents from from around the the world world had had similarly urgent comments (see (see box). box). Many Many respondents worried that that banks banks have have little little power to to prevent attacks because cybercrime comes in in many many different guises, from from opportunistic hackers holding private data data hostage, to to organised criminals pilfering funds funds through digital channels, to to states states using using espionage to to steal steal banks intellectual property. Ashley Dowson, chairman of of Sepa Sepa Consultancy in in the the UK, UK, saw saw potential for for even even greater threats as as financial institutions experiment with with new new technologies crypto currencies, distributed ledgers, and and real-time payments and and settlement. Banks underinvestment in in their their creaking technology systems means they they are are on on the the back back foot foot while while criminals become more more numerous, sophisticated and and audacious. A A respondent in in the the US US said: said: Cyber criminals work work hours hours a day a day and and 7 days 7 days a a week, week, and and don't don't have have to to pay pay taxes taxes on on their their gains. gains. The The industry is very is very vulnerable. The The material risk risk is potentially very very large. large. Billions are are lost lost annually in in these these types types of of attack, said said a banker a in in New New Zealand, while while an an industry observer in in the the UK UK warned that that cyber-attack on on key key financial infrastructure could could paralyse key key activities - such - such as as interbank payments - for - for some some days. CSFI / New York CSFI info@csfi.org Web: 13

17 All banks are are vulnerable through the the weakest link in weakest link in the system the system And there are other risks: regulatory reprimand, fines and reputational damage from And there impaired are other security risks: regulatory and theft reprimand, of customer fines data. and reputational damage from impaired security and theft of customer data. Even if banks do rise to the challenge, criminals will target the weakest links of a Even if banks do rise to the challenge, criminals will target the weakest links of a heavily heavily interconnected interconnected financial system financial which system is currently which seeing is currently a proliferation seeing of proliferation of new players. new players. While banks While ready banks their ready cyber defences, their cyber suppliers defences, and other suppliers financial and other financial market market infrastructure infrastructure (i.e. payment (i.e. systems) payment will systems) need to be will prepared, need to but be are prepared, not but are not subject subject to the same to the regulatory/supervisory same regulatory/supervisory authority as authority the banks, as said the a banks, risk said a risk manager manager in Canada. in Canada. Cyber theft will only grow and at least one bank will fail in the next 10 years as a result - Cyber Chief financial theft will officer, only grow Singapore and at least one bank will fail in the next 10 years as a result - Chief financial officer, Singapore A severe cyber attack could bring down a major financial institution or a financial market infrastructure/bourse, A severe cyber attack and could create bring a systemic down impact a major financial institution or a financial - Regulator, Canada market infrastructure/bourse, and create a systemic impact - Regulator, Canada Money laundering and tax evasion can harm reputation and cause regulatory penalties but are unlikely to be life threatening. Cybercrime, though, could destroy Money a bank - laundering Observer, UK and tax evasion can harm reputation and cause regulatory penalties but are unlikely to be life threatening. Cybercrime, though, could Every bank destroy is vulnerable, a bank - and Observer, a coordinated UK attack could be devastating. Adoption of new technologies makes this a growing risk. - Risk manager, Every bank USA is vulnerable, and a coordinated attack could be devastating. Adoption of new technologies makes this a growing risk. We are awaiting the first default caused by cybercrime due to loss of funds entrusted - Risk - Chief manager, risk officer, USA The Netherlands We are awaiting the first default caused by cybercrime due to loss of funds entrusted - Chief risk officer, The Netherlands Only five respondents out of 672 gave this risk a score of 1 out of five. Among their reasons were that this was a passing scare like Y2K, that the risk lay more in regulatory penalties than actual theft, and that tougher controls would keep the risk at bay. Only five respondents out of 672 gave this risk a score of 1 out of five. Among their reasons were that this was a passing scare like Y2K, that the risk lay more in Respondents paid less attention to more conventional forms of crime. The head of regulatory penalties than actual theft, and that tougher controls would keep the risk finance at a bank in Luxembourg said: Money laundering and tax evasion can be prevented at bay. by good compliance measures and scrutiny of the economic background of transactions. But a few concerns were raised, mainly in emerging economies. A respondent Respondents in Nigeria spoke paid less of the attention threat of to enhanced more conventional corruption and forms the impact of crime. on The head of money finance laundering. at a Mohammad bank in Luxembourg Pourgholamali, said: head Money of corporate laundering banking and at Bank tax evasion can be Pasargad prevented in Iran, said: by good Terrorism compliance finance and measures the money and stream scrutiny from of terrorism the economic is a background very important of transactions. challenge all But over a the few world, concerns and specifically were raised, in the mainly Middle in East. emerging economies. A respondent in Nigeria spoke of the threat of enhanced corruption and the impact on money laundering. Mohammad Pourgholamali, head of corporate banking at Bank Pasargad in Iran, said: Terrorism finance and the money stream from terrorism is a very important challenge all over the world, and specifically in the Middle East. 14 CSFI / New York CSFI info@csfi.org Web:

18 Regulatory risk risk has become more nuanced 3. Regulation (1) 3. Regulation (1) The risk that the current wave of regulation will have a damaging effect on The risk banks that the current wave of regulation will have a damaging effect on banks Concern about the potentially damaging impact of regulatory tightening continues to Concern rank about high the potentially among the damaging risks that impact people of regulatory see the tightening health continues of the banking to industry. rank high However among there risks has that been people a noticeable see to the shift health in opinion of the banking away from industry. the strong concerns However voiced there in has the been 2014 a noticeable survey shift (when in opinion regulation away was from voted the strong top concerns risk), towards a more voiced nuanced in the 2014 view survey which (when accepts regulation the need was voted for tougher top risk), controls, towards though a more also questions nuanced view which accepts the need for tougher controls, though also questions their cost and effectiveness. their cost and effectiveness. This was This the was No. the 2 risk No. for 2 bankers risk for but bankers lower for but those lower outside for those the industry outside the industry (observers (observers placed it placed No.4). it Geographically, No.4). Geographically, it was seen to it be was the seen highest to be in Europe the highest in Europe (No. 2), (No. with 2), North with America North placing America it No. placing 3 and it the No. Far 3 East and Pacific the Far region East No. Pacific 7 region No. 7 The regulatory The regulatory crackdown crackdown since the since financial the crisis financial is still crisis widely is seen still to widely be seen to be excessive, costly and rife with inconsistencies and unintended consequences. Many excessive, costly and rife with inconsistencies and unintended consequences. Many respondents said its volume and complexity were eating into management time and industry respondents margins while said its producing volume questionable and complexity benefits. were A eating respondent into management from time and Germany industry saw an margins overkill in while risk reporting producing without questionable any additional benefits. added value A for respondent from the system. Germany One saw European an overkill banker even in risk said reporting that regulatory without cost any had additional reached the added value for point where the system. non-compliance One European is economically banker even justifiable, said that and regulatory was only kept cost in had reached the check by point reputation where risk. non-compliance is economically justifiable, and was only kept in check by reputation risk. Respondents singled out particular My main concern is the regulatory pendulum since This has consequences, such as a loss of Respondents singled out particular massively derisked My main the banking concern sector is the regulatory innovation and diversity as banks consequences, such as loss with an of avalanche pendulum of liquidity, since solvency, This has conformed to the same rules, and a compliance and massively governance derisked reporting the banking sector reduction innovation competition and because diversity of as requirements banks with and banking avalanche taxes (and of liquidity, solvency, the disproportionate conformed to the impact same on rules, more and to a come...). compliance Is the global and governance reporting smaller reduction banks and in the competition rise in entry because equilibrium of right? requirements Is the banking and sector banking taxes (and barriers. the A credit disproportionate analyst said that able to take and manage risks to impact on more to come...). Is the global regulation was encouraging promote economic growth efficiently, or smaller banks and the rise in entry equilibrium right? Is the banking sector herding so that banks will migrate are we moving to an inefficient zero risk barriers. A credit analyst said system? that able to take and manage risks to to portfolios that have identical regulation was encouraging Emmanuel Vercoustre promote economic growth efficiently, or optimal regulatory profiles. If this Deputy CEO herding so that banks will migrate are and we Chief moving Financial to an Officer inefficient zero risk were to happen it would amplify AXA Banque system? Europe, Belgium systemic to risk. portfolios that have identical Emmanuel Vercoustre optimal regulatory profiles. If this Deputy CEO and Chief Financial Officer Proposals were to ring-fence to happen retail it would operations amplify in many markets, including the UK, were AXA Banque Europe, Belgium a particular systemic concern. risk. A UK banking professor said the UK proposals will have the effect of weakening, rather than strengthening, the banking system, besides raising costs and inefficiencies. Proposals to ring-fence retail operations in many markets, including the UK, were But these a particular concerns - concern. many of A them UK familiar banking from professor previous said Banana the Skins UK proposals surveys - will have the were balanced effect of by weakening, the large number rather of than respondents strengthening, who felt the that banking - on the system, whole - besides raising what was costs happening and inefficiencies. was necessary and beneficial. Banks were stronger, more risk aware - and in many cases were operating profitably despite the sharp rise in compliance But these costs. concerns A US regulator - many argued of them that familiar the economic from effects previous of the Banana crisis Skins surveys - have had (and continue to have) a much more serious effect on bank performance were balanced by the large number of respondents who felt that - on the whole - than the post-crisis reforms, and the chief risk officer of a Canadian bank said that regulation what isn't was going happening away and was most necessary institutions and have beneficial. adapted to Banks the impact were of new stronger, more risk requirements. aware - and in many cases were operating profitably despite the sharp rise in compliance costs. A US regulator argued that the economic effects of the crisis have had (and continue to have) a much more serious effect on bank performance than the post-crisis reforms, and the chief risk officer of a Canadian bank said that regulation isn't going away and most institutions have adapted to the impact of new requirements. CSFI / New York CSFI info@csfi.org Web: 15

19 Banking systems are are badly badly out out of of date date 4. Technology risk (4) The risk that banks will fail to keep up with technological change 4. Technology risk (4) After jumping 14 places in 2014, technology risk is still seen to be exceedingly The risk urgent that banks this year. will fail It to was keep ranked up with No.2 technological in the Far East change Pacific region. After jumping 14 places in 2014, technology risk is still seen to be exceedingly The heart of the problem is seen to lie in hopelessly out-dated core banking IT urgent this year. It was ranked No.2 in the Far East Pacific region. systems, suffering from many years of under-investment and now ill-equipped to The heart cope of the with problem the strains is seen placed to lie on in hopelessly them by the out-dated digital core and banking mobile banking IT revolution. systems, Alexander suffering from Campbell, many years editor of under-investment of Operational and Risk now & ill-equipped Regulation to magazine, said a cope with failure the strains to keep placed pace on with them technology by the digital is and not mobile so much banking a risk revolution. as a certainty; the burden Alexander of Campbell, multiple legacy editor of systems Operational some Risk banks & Regulation (due to magazine, a history said of mergers) a is already failure to causing keep pace real with problems. technology The is not consequence so much a risk that as a certainty; banks are the vulnerable burden to cybercrime of multiple legacy systems at some banks (due to a history of mergers) is already and service disruptions, and risk alienating customers who have already embraced causing real problems. The consequence is that banks are vulnerable to cybercrime and service technology disruptions, in other and risk areas alienating of their customers lives. who have already embraced technology in other areas of their lives. Banks create vested interests As one UK banker put it, Substantial Banks create internally vested in interests all sorts of areas. As IT one is UK banker spending put [being] it, Substantial needed at a time when internally an in all example sorts of with areas. staff IT is seeing spending their [being] income needed is at low a time and when costs [are] being an example jobs with being staff dependent seeing their on keeping income a is low driven and costs hard [are] is not being jobs being a good recipe for system dependent in place. on keeping Kills innovation. a driven hard is not a good recipe for system in place. Kills innovation. investment. But even if banks have no Andrew Henderson investment. But even if banks have no Andrew Henderson Managing director choice, the question of how and where to Managing director choice, the question of how and where to Wychwood Consulting, UK invest is a difficult one: there is a fear Wychwood Consulting, UK invest is a difficult one: there is a fear that new and that costly new systems and costly could be systems could be quickly rendered quickly obsolete. rendered The cost obsolete. and The cost and complexity complexity of IT updates of IT is updates difficult to is justify, difficult said to a justify, treasurer said in New a treasurer Zealand. in New Zealand. Compounding Compounding this is that this banks is may that banks incur new may risks incur as they new try risks to keep as they pace, try said to keep pace, said a financial a financial analyst in analyst the US in such the as US systems such outages as systems from bungled outages upgrades. from bungled upgrades. A widely echoed point was that if banks do not respond to changing technology, disruptive A widely innovators echoed such point as Google was that and Apple if banks may do steal not market respond share to changing very technology, quickly by disruptive disintermediating innovators banks such from their as Google clients, and according Apple to a may risk manager steal market share very in Canada. quickly The by director disintermediating of finance at banks a bank from in their India clients, said: Technological according to a risk manager innovations Canada. will eat away The chunks director of business of finance from banks, at a such bank as the in large India number said: Technological of payment innovations apps and the will expansion eat away of chunks financial of services business support from through banks, technology such as the large number companies. of payment apps and the expansion of financial services support through technology companies. But some respondents warned that Large banks continue to rely on old banks should not try and overreach in systems that simply cannot provide the this area. But some Those respondents who follow warned customer that experience Large and banks expectations continue to rely on old banks should not try and overreach of today. technology change for its own sake in systems that simply cannot provide the Mohamed Datoo will go this down. Those area. who Those wait until who follow customer experience and expectations Governance, risk of today. & compliance someone technology else has taken change the risks for and its own consultant sake used trustworthy Mohamed Datoo will go down. technology Those who to wait Honda until Financial Services, Canada underpin market innovations will do Governance, risk & compliance someone else has taken the risks and much better, said Philip Virgo, director of Winsafe in the consultant UK. Another UK-based risk manager used said: trustworthy Banks don't technology need to be at to the forefront Honda Financial [of technological Services, Canada change], underpin merely the market pack behind. innovations Staying will close do enough will be the hardest task. much better, said Philip Virgo, director of Winsafe in the UK. Another UK-based risk manager said: Banks don't need to be at the forefront [of technological change], merely in the pack behind. Staying close enough will be the hardest task. 16 CSFI / New York CSFI info@csfi.org Web:

20 Banking Banana Skins 2015 Template draft 1 5. political interference (2) 5. Political The risk interference of political interference (2) in management and lending policies, or the The risk imposition of political interference of new mandates, in management taxes and and lending costs policies, or the imposition of new mandates, taxes and costs The risk of political interference ranks high in the minds of bankers, still sore from The risk of the political bashing interference they received ranks high in in the past minds seven of bankers, years. still But sore concern from about this risk is the bashing easing. they It received was down in the three past seven places years. and But its absolute concern about score this dropped risk is a few basis points, easing. It suggesting was down three in the places words and its of absolute former score banking dropped supervisor a few basis Richard points, Farrant, Banks are suggesting in the words of former banking supervisor Richard Farrant, Banks are still an easy still political an easy target, political but this target, is diminishing but this with is diminishing time. with time. Is political risk really on the wane? Is political risk really on the wane? The question The is question whether this whether perennial this risk perennial is really abating risk is or really merely abating on hold while or merely on hold while public opinion public makes opinion its mind makes up about its mind banking up behaviour. about banking The sceptics behaviour. felt that The sceptics felt that nothing much nothing had really much changed. had really A chief changed. operating A chief officer operating one of the officer large UK at one of the large UK banks said banks there said was a there tendency was for a tendency society, regulators for society, and politicians regulators view and politicians to view banking as a community service where 'profit' is unacceptable. In Switzerland, Daniel Martineau, banking executive as a community chairman of service Summit Trust where International, 'profit' is said: unacceptable. This has In Switzerland, been true Daniel in Switzerland Martineau, and is executive likely to continue chairman I'm sorry of Summit to say, to Trust the detriment International, of said: This has the jurisdiction. been true in Switzerland and is likely to continue I'm sorry to say, to the detriment of the jurisdiction. Even if the financial crisis is now a matter of the past, respondents saw plenty of reasons why Even governments if the financial might step crisis in again: is now the need a matter to raise of revenues the past, at a respondents time of saw plenty of budget stress, to direct lending to socially useful sectors or, conversely, to constrain reasons lending to why bubble governments sectors such might as housing step and in to again: encourage the need new entrants to raise to revenues at a time of take on the budget established stress, banks. to The direct head lending of operational to socially risk at a Luxembourg useful sectors bank or, conversely, to saw a political constrain agenda lending which to included bubble investor sectors protection, such as housing rebuilding and the to national encourage new entrants to tax base and take combating on the established profit shifting. banks. The head of operational risk at a Luxembourg bank saw a political agenda which included investor protection, rebuilding the national The political tax base outlook and is combating also very uncertain, profit shifting. with major elections in the offing in many places, including the US, and highly unsettled conditions in the eurozone and the Middle East. The Greek response here was apprehensive for obvious reasons. The political outlook is also very uncertain, with major elections due in many However places, there is including little consistency the US, to this and risk, highly its level unsettled depending conditions very much in on the eurozone and the individual Middle countries. East. Among The our Greek respondents, response concern here was highest apprehensive in Europe for and obvious reasons. A North America, banker and said: among "In tax Greece havens which the main always concern feel vulnerable is country to political risk and whether the mood swings government the horizon. will stick A respondent to its commitments from the Cayman towards Islands creditors said: The and implement the [EU fear is that the US and later other jurisdictions limit who they allow their banks to do business with, bail-out] and I memorandum. can see it including banks in perceived tax havens. The UK view However was broadly there positive. is little Although consistency British to banks this risk, have its had level a rough depending ride very much on since the individual crisis, there is countries. a clear perception Among that our the respondents, government wants concern to call was a halt highest in Europe and and allow North them to America, recover confidence and among and trust. tax havens A bank which director always said this feel was an vulnerable to political ever present mood risk swings but [is] unlikely over the to horizon. reach a level A respondent that threatens from financial the stability. Cayman Islands said: The Politicians generally pull back from the brink when they get close to this. fear is that the US and later other jurisdictions limit who they allow their banks to do business with, and I can see it including banks in perceived tax havens. The UK view was broadly positive. Although British banks have had a rough ride since the crisis, there is a clear perception that the government wants to call a halt and allow them to recover confidence and trust. A bank director said this was an ever present risk but [is] unlikely to reach a level that threatens financial stability. Politicians generally pull back from the brink when they get close to this. 17 CSFI / New York CSFI info@csfi.org Web: 17