Bankers in regulatory backlash

2005

Bankers believe that a remorseless rise in regulation has become the greatest risk facing the banking sector as regulatory overkill saps resources, reduces risk diversification and creates a false sense of security.

A report from the Centre for the Study of Financial Innovation (CSFI), an independent City of London think tank, has revealed a major disconnect between policy-makers and bankers, with many senior bankers describing regulation as "out of control”.

The threat of excessive regulation was perceived to be particularly strong in the EU and North America.

The CSFI's annual ‘Banana Skins’ survey, sponsored by PWC, is based on responses from 440 bankers and close observers of the banking scene in 54 countries. It ranks banking risks by their perceived severity, and analyses their potential impact on the industry.

Other fast-rising risks identified in this year’s poll are hedge funds (ranked 5th) and electronic fraud (6th), as well as currency risk (7th) due to the shaky US dollar.

Credit risk (2nd) and derivatives (4th) both featured prominently in last year’s survey.

Closely linked to overregulation is the high place given in the rankings to corporate governance risk (now ranked 3rd). Although banks are seen to have weaknesses in this area, this Banana Skin also scores strongly because respondents – particularly bankers – perceive it to be part of the regulatory threat.

John Hitchins, UK Banking Leader at PricewaterhouseCoopers, said: "Bankers have thrown down a challenge against too much prescriptive regulation. Many are worried that it is beginning to stifle innovation and judgement across the industry.

While few challenge the objectives of regulators, there is a clear need for further debate on how these are implemented."

However the survey found that banks were seen to be generally less well prepared to handle risk than before. Fifty seven per cent of respondents thought banks were moderately well prepared or better to handle the risks, down from 69 per cent on the previous survey.

One reason was the inclusion in this survey of a larger proportion of respondents from emerging market and EU accession countries where bank readiness was seen to be less advanced than in industrial nations.

In the advanced banking markets, the considerable risk control work of recent years is considered to be paying off in higher awareness and better systems, though this is offset by fears that banks may be becoming too complacent or process-driven.

David Lascelles, the CSFI’s co-director who ran the survey, said: "It is ironic that people now see the greatest dangers in regulation when new types of risk are emerging all the time: hedge funds, derivatives, electronic fraud.

"Banks should not be distracted from these risks by box-ticking and form-filling”.