Bananaskins Jul08

Banking
Banana Skins
2008
An industry
in turmoil
The CSFI
survey of
bank risk
In association with
CSFI
Centre for the Study of

Financial Innovation
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 and efficient 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 Carole Magnaschi
Governing Council
Sir Brian Pearse (Chairman)
Sir David Bell
Geoffrey Bell
Robert Bench
Rudi Bogni
Peter Cooke
Bill Dalton
Sir David Davies
Prof Charles Goodhart
John Heimann
Rene Karsenti
Henry Kaufman
Angela Knight
Richard Lambert
David Lascelles
Robin Monro-Davies
Rick Murray
John Plender
David Potter
Mark Robson
Sir Brian Williamson
Peter Wilson-Smith
Minos Zombanakis
CSFI publications can be purchased through our website www.bookstore.csfi.org.uk 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.uk
Web: www.csfi.org.uk
CSFI 2008
This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective
licensing agreements, no reproduction of any part may take place without the written permission of the Centre.
ISBN: 978-0-9551811-8-4
Printed in the United Kingdom by Heron, Dawson & Sawyer
CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

NUMBER EIGHTY ONE
MAY 2008
Preface
Welcome
Welcome to
to the
the 2008
2008 Banking
Banking Banana
Banana Skins
Skins survey
survey -- the
the ninth
ninth we
we have
have carried
carried out
out in
in this
this format.
format. As
As John
John Hitchins
Hitchins
makes
makes clear
clear in
in his
his foreword,
foreword, it
it is
is instructive
instructive to
to see
see how
how perceptions
perceptions of
of risk
risk have
have changed
changed over
over that
that period.
period. Inevitably,
Inevitably,
fears
fears reflect
reflect the
the times,
times, and
and this
this survey
survey was
was carried
carried out
out against
against the
the background
background of
of aa global
global liquidity
liquidity crunch
crunch following
following the
the
US
US sub-prime
sub-prime debacle,
debacle, and
and the
the re-emergence
re-emergence of
of the
the rogue
rogue trader
trader phenomenon
phenomenon at
at Socit
Socit Gnrale.
Gnrale. No
No surprise,
surprise,
therefore,
therefore, about
about the
the Banana
Banana Skins
Skins that
that have
have risen
risen to
to the
the top
top of
of respondents
respondents risk
risk ranking
ranking
or
or about
about which
which are
are the
the fastest
fastest
risers.
risers.
As
As always,
always, David
David Lascelles,
Lascelles, the
the CSFIs
CSFIs senior
senior fellow
fellow and
and author
author of
of the
the report,
report, offers
offers aa Rolls-Royce
Rolls-Royce ride
ride through
through the
the
perils
perils of
of banking.
banking. But
But dont
dont let
let his
his mellifluous
mellifluous prose
prose fool
fool you.
you. A
A lot
lot of
of effort
effort goes
goes into
into this
this exercise
exercise
and
and the
the level
level of
of
respondents
respondents is
is awesome.
awesome. When
When David
David says
says someone
someone is
is senior
senior he
he (or
(or she)
she) is
is very
very senior.
senior. We
We are
are very
very grateful
grateful to
to
everyone
everyone who
who took
took the
the time
time to
to complete
complete the
the survey
survey
which,
which, for
for the
the first
first time,
time, was
was available
available online
online through
through
SurveyMonkey.
SurveyMonkey.
Thanks
Thanks also
also to
to PricewaterhouseCoopers
PricewaterhouseCoopers for
for continuing
continuing to
to sponsor
sponsor this
this survey,
survey, and
and for
for helping
helping to
to garner
garner responses
responses from
from
around
the
world.
The
responsibility
is
the
CSFIs,
but
none
of
it
could
have
happened
without
the
generosity
around the world. The responsibility is the CSFIs, but none of it could have happened without the support of of PwC.
Roll
on next year.
PricewaterhouseCoopers.
Roll on next year.
Andrew
Andrew Hilton
Hilton
Director,
Director, CSFI
CSFI
This
This report
report was
was written
written by
by David
David Lascelles
Lascelles
Cover
Cover by
by Joe
Joe Cummings,
Cummings, with
with acknowledgements
acknowledgements to
to Skegness
Skegness is
is SO
SO bracing!
bracing!
Foreword
Foreword
PricewaterhouseCoopers is delighted to sponsor another year of Banking Banana Skins.
PricewaterhouseCoopers is delighted to sponsor another year of Banking Banana Skins
The 2008 vintage is as thought-provoking as usual and is all the more interesting for appearing in the middle of a global
crisis.
The 2008 vintage is as thought-provoking as usual and is all the more interesting for appearing in the middle of a global
crisis.
Unsurprisingly the credit crunch dominates the responses with new banana skins, liquidity and credit spread volatility,
in
the top three.the
Thoughts
and insights
on the
crunchwith
go much
further skins,
than this
and areand
threaded
right through
the
Unsurprisingly
credit crunch
dominates
thecredit
responses
new banana
liquidity
credit spread
volatility,
survey.
that we could
see the on
failure
of another
have further
been borne
out with
thethreaded
collapseright
of Bear
Stearns
in the topWorries
three. Thoughts
and insights
the credit
crunchbank
go much
than this
and are
through
the
even
before
the CSFI
could
finish
Bank
share
prices
verythevolatile
andofsusceptible
to
survey.
Worries
that we
could
see analysing
the failurethe
of responses.
another bank
have
been
borneremain
out with
collapse
Bear Stearns
market
rumour.
even before
the CSFI could finish analysing the responses. Bank share prices remain very volatile and susceptible to
market rumour.
As several respondents to the survey said, a fundamental issue is that trust has been lost across the industry, and it is
likely
to be respondents
a long and painful
to rebuild
it.
As several
to the road
survey
said, a fundamental
issue is that trust has been lost across the industry, and it is
likely to be a long and painful road to rebuild it.
It is interesting to look back at the 2006 survey. With no mention of liquidity as a separate banana skin the initial
conclusion
is that
oneback
foresaw
scalesurvey.
of the With
risks no
being
run. However,
when
read further
It is interesting
to no
look
at thethe2006
mention
of liquidity
as you
a separate
bananathere
skinare
thethemes
initial
from
2006 that
have
a significant
part
current
Id highlight
particular:
conclusion
is that
no played
one foresaw
the scale
of in
thethe
risks
beingcrisis.
run. However
whenthree
you in
read
further there are themes from
2006 that have played a significant part in the current crisis. Id highlight three in particular :
x Part of the reason that credit risk kept its second place last time were fears that credit defaults could trigger a
tightening
liquidity.
x significant
Part of the reason
thatofcredit
risk kept its second place were fears that credit defaults could trigger a significant
tightening
of
liquidity.
x There was plenty of concern about the opacity of where residual risk was ending up. Although mentioned
the context
of derivatives
time,ofopacity
clearly
contributed
to up.
the loss
of trustmentioned
this time.
x primarily
There wasinplenty
of concern
about thelast
opacity
where has
residual
risk
was ending
Although
As
we publish
survey,
debate rages
about
level ofhas
disclosures
that the industry
primarily
in thethis
context
ofaderivatives
last
time,theopacity
clearly contributed
to the should
loss ofmake.
trust this time.
Asnumber
we publish
this survey, a worried
debate rages
aboutthat
the risk
levelmanagement
of disclosures
that
the industry
should make.and losing
x A
of commentators
last time
was
becoming
too mechanistic
human of
element.
For many
banks last
the current
crisis
clearly a wake-up
call that too
riskmechanistic
managementand
needs
an
x the
A number
commentators
worried
time that
risk ismanagement
was becoming
losing
overhaul.
the human element. For many banks the current crisis is clearly a wake-up call that risk management needs an
overhaul.
So maybe the last survey did get it right after all! I commend this survey to you for a close read as the seeds of the next
big
bananathe
skin
may
well did
be buried
in theafter
detail.
role of sovereign
wealth
So maybe
last
survey
get it right
all! The
I commend
this survey
to youfunds
for aperhaps?
close read as the seeds of the next
big banana skin may well be buried in the detail. The role of sovereign wealth funds perhaps?
John Hitchins
UK
Leader
JohnBanking
Hitchins
PricewaterhouseCoopers
UK Banking Leader
About this survey

This survey was designed to learn how bankers and close observers of the banking scene perceive the risks facing the
industry. 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 rate a list of potential risks, or Banana Skins, selected by a CSFI/PricewaterhouseCoopers panel, by
severity on a scale of 1-5 and whether they were rising, steady or falling. 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 identified. The survey was conducted in February and March 2008, and received 376 responses from
38 countries.
The breakdown of respondents by type was:
Regulators
6%
Observers
35%
Bankers
59%
The responses by country were as follows:

Australia
Austria
Belgium
Bermuda
Brazil
Canada
Channel Is
Czech Rep.
Fiji
France
Germany
Gibraltar
Greece
Hong Kong
Hungary
Indonesia
Isle of Man
Ireland
Italy
15
5
2
3
1
9
2
5
1
2
5
1
8
1
6
4
5
4
3
Japan
Liechtenstein
Luxembourg
Malta
Multinational
Netherlands
Philippines
Poland
Portugal
Romania
Russia
Singapore
South Africa
Spain
Sweden
Switzerland
UAE
UK
US
11
1
4
1
1
6
1
4
1
4
25
3
4
4
4
9
1
190
20

Summary
Summary
Liquidity
Liquidityshortage
shortage
isisthe
thegreatest
greatestrisk
risk
facing
facingthe
thebanking
banking
industry
industry
This
This
report
report
surveys
surveys
perceptions
perceptions
of of
risks
risksin inthethebanking
bankingindustry
industryin in
early
early 2008
2008 a a time
time of of
unprecedented
unprecedentedturmoil.
turmoil.
TheThe
overall
overall
level
level
of of
risk
risk
in in
thethe
market
market
is at
is at
an an
all-time
all-time
high,
high,
as as
measured
measured
by by
thethe
Banana
Banana
Skins
Skins
Index
Index
which
which
goes
goes
back
back
to 1998.
to 1998.
TheThemost
mostsevere
severeriskriskfacing
facingthethe
industry
industry
is seen
is seen
to to
be be
liquidity,
liquidity,
or or
thethe
lack
lack
of of
it. it.With
With
many
many
markets
markets
at at
a standstill
a standstill
since
since
thethe
collapse
collapse
of of
thethe
USUS
sub-prime
sub-prime
market
market
in in
midmid2007,
2007,banks
banksareareimmobilised
immobilisedby by
funding
funding
shortages
shortages
andand
an an
inability
inability
to to
value
value
andand
dispose
dispose
of of
assets.
assets.
TheThe
expectation
expectation
is that
is that
these
these
difficulties
difficulties
willwillpersist
persistandandhave
haveserious
serious
knock-on
knock-on
effects
effects
in other
in other
markets.
markets.
In Inparticular,
particular,they
theywillwillincrease
increase
credit
credit
risk
risk
(No(No
2) 2)
as as
banks
banks
andand
their
their
customers
customers
come
come
under
under
strain.
strain.
Within
Within thethe financial
financial services
services
market,
market,thethesoundness
soundnessof ofbanks,
banks,
hedge
hedge
funds
funds
(No(No
10)10)
andand
private
private
equity
equityarearekeykeyconcerns.
concerns.(The
(The
survey
survey
waswas
carried
carried
outout
before
before
thethe
collapse
collapse
of of
Bear
Bear
Stearns).
Stearns).OnOn
thethe
lending
lending
front,
front,
thethe
main
main
focus
focus
is on
is on
consumer
consumer
credit
credit
because
because
of of
a weak
a weak
housing
housing
market
market
andand
high
high
personal
personal
debt,
debt,
butbut
corporate
corporate
credit
credit
is is
also
also
seen
seen
to be
to be
at risk.
at risk.
Banking
Banking
Banana
Banana
Skins
Skins
2008
2008
(2006
(2006
ranking
ranking
in brackets)
in brackets)
1 1Liquidity
Liquidity
(-) (-)
2 2Credit
Credit
riskrisk
(2)(2)
3 3Credit
Credit
spreads
spreads
(-) (-)
4 4Derivatives
Derivatives
(3)(3)
5 5Macro-economic
Macro-economic
trends
trends
(14)
(14)
6 6Risk
Risk
management
management
techniques
techniques
(10)
(10)
7 7Equities
Equities
(12)
(12)
8 8Too
Too
much
much
regulation
regulation
(1)(1)
9 9Interest
Interest
rates
rates
(5)(5)
10 10Hedge
Hedge
funds
funds
(7)(7)
11 11Fraud
Fraud
(11)
(11)
12 12Commodities
Commodities
(4)(4)
13 13Currencies
Currencies
(13)
(13)
14 14Rogue
Rogue
trader
trader
(27)
(27)
15 15High
High
dependence
dependence
on on
technology
technology
(6)(6)
16 16Corporate
Corporate
governance
governance
(8)(8)
17 17Management
Management
incentives
incentives
(26)
(26)
18 18Emerging
Emerging
markets
markets
(9)(9)
19 19Back
Back
office
office
(24)
(24)
20 20Retail
Retail
sales
sales
practices
practices
(22)
(22)
21 21Conflicts
Conflicts
of interest
of interest
(16)
(16)
22 22Political
Political
shocks
shocks
(15)
(15)
23 23Business
Business
continuation
continuation
(21)
(21)
24 24Money
Money
laundering
laundering
(18)
(18)
25 25Environmental
Environmental
riskrisk
(25)
(25)
26 26Banking
Banking
market
market
over-capacity
over-capacity
(17)
(17)
27 27Payment
Payment
systems
systems
(29)
(29)
28 28Merger
Merger
mania
mania
(19)
(19)
29 29Too
Too
little
little
regulation
regulation
(30)
(30)
30 30Competition
Competition
from
from
new
new
entrants
entrants
(28)
(28)
Many
Many
of of
thethe
markets
markets
difficulties
difficulties
areare
duedue
to to
thethe
widening
widening
of of
credit
credit
spreads
spreads
(No(No
3) 3)
as as
thethe
process
process
of of
riskrisk
re-pricing
re-pricing
continues.
continues. (Both
(Both
liquidity
liquidity
andand
credit
credit
spreads
spreads
make
make
their
their
first
first
appearance
appearance
in in
thethe
Banana
Banana
Skins
Skins
ranking,
ranking,
an an
indication
indication
of of
thethe
suddenness
suddenness
of of
thethe
crisis
crisis
onset.)
onset.)
IsIsrisk
risk
management
management
working?
working?
Many
Many
of of
thethe
markets
markets
difficulties
difficulties
areare
duedue
to to
derivatives
derivatives
(No(No
4),4),
particularly
particularly
thethe
useuse
of of
credit
credit
derivatives
derivatives
in structured
in structured
products
products
built
built
on on
sub-prime
sub-prime
mortgages.
mortgages.These
These
areare
expected
expectedto tobe bevery
verydifficult
difficultto tounwind,
unwind,andandwillwilladdaddto toliquidity
liquidityandandcredit
credit
problems.
problems. Generally,
Generally,
thethe
crisis
crisis
hashas
raised
raised
doubts
doubts
about
about
thethe
effectiveness
effectiveness
of of
risk
risk
management
management
in banks
in banks
(up(up
from
from
NoNo
10 10
to No
to No
6).6).
TheThe
burden
burden
of of
tootoo
much
much
regulation,
regulation,
which
which
topped
topped
thethe
Banana
Banana
Skins
Skins
polls
polls
in the
in the
lastlast
twotwo
years,
years,
fellfell
sharply
sharply
to to
NoNo
8. 8.ButBut
thisthis
waswas
a case
a case
of of
being
being
overtaken
overtaken
by by
more
more
The
The
threat
threat
ofof
USUS
The
threat
recession
recession of US
recession
urgent
urgent
concerns:
concerns:
its risk
its its
risk
score
score
waswas
little
little
changed
changed
from
from
last
last
time,
time,
with
with
the
the
focus
focus
nownow
urgent
concerns:
risk
score
was
little
changed
from
last
time,
with
the
focus
now
on the
on on
the
threat
threat
of aofknee
a knee
jerk
jerk
reaction
reaction
to the
to the
crisis.
crisis.
the
threat
of
a knee
jerk
reaction
to
the
crisis.
AllAll
these
these
Banana
Banana
Skins
Skins
are are
set set
against
against
a background
a background
of of
macro-economic
macro-economic
deterioration
deterioration
(up(up
from
from
No No
14
14
to No
toare
No
5), set
5),
particularly
particularly
threat
threat
of recession
of recession
in the
in the
US.US.
All these
Banana
Skins
against the
a the
background
of macro-economic
Although
Although
other
other
parts
parts
of
of
the
the
world
world
are
are
seen
seen
as
as
less
less
vulnerable,
vulnerable,
(for
(for
example,
example,
deterioration (up from No 14 to No 5), particularly the threat of recession in the US.
emerging
emerging
markets
markets
down
atof at
No
18),
18),
none
none
isseen
expected
is expected
to
remain
remain
completely
completely
Although
otherdown
parts
theNo
world
are
as lesstovulnerable,
(for
example,
untouched
untouched
by by
trends
trends
in the
in down
the
US.US.atAnd
And
tough
tough
economic
economic
times
times
willwill
drag
the the
equity
equity
emerging
markets
No
18),
none
is expected
todrag
remain
completely
markets
markets
(No(No
7) down
7)
with
with
them.
them.
untouched
by down
trends
in
the
US. And tough economic times will drag the equity
markets (No 7) down with them.
Other
Other
high-ranking
high-ranking
market
market
risks
risks
include
include
interest
interest
rates
rates
(No(No
9), 9),
commodities
commodities
(No(No
12)12)
and
and
currencies
currencies
(No(No
13).
13). risks
AllAll
are
are
expected
expected
to show
to
show
continuing
volatility,
volatility,(No
Other
high-ranking
market
include
interest
rates
(Nocontinuing
9), commodities
particularly
particularly
interest
interest
rates
rates
as(No
central
as 13).
central
banks
banks
grapple
grapple
withwith
theto
the
conflicting
conflicting
pressures
pressures
of of
12) and
currencies
All
are
expected
show
continuing
volatility,
slowing
slowing
economies
economies
andand
rising
rising
inflation.
Commodities
slipped
several
several
places
places
on the
on the of
particularly
interest
rates
asinflation.
central Commodities
banks
grappleslipped
with
the
conflicting
pressures
view
view
that
that
recent
recent
volatility
volatility
might
might
have
have
peaked.
peaked.
TheThe
main
main
currency
currency
concern
remains
remains
slowing
economies
and
rising
inflation.
Commodities
slippedconcern
several
places
on the
the the
USview
US
dollar.
dollar.
that recent volatility might have peaked. The main currency concern remains
the US dollar.
BigBig
movers
movers
UP UP
Big movers
shortage
lieslies
at the
at the
heart
heart
of the
of the
crisis
crisis
Liquidity:
Liquidity:
UP shortage
spreads:
spreads:
repricing
repricing
risk
Credit
Credit
shortage
liesrisk
at the heart of the crisis
Liquidity:
threat
threat
of recession
of recession
in the
US,US,
andand
spill-over
spill-over
Macro-economy:
Macro-economy:
repricing
risk in the
Credit spreads:
management
management
techniques:
techniques:
inadequate
inadequate
to
deal
to
deal
with
with
unfamiliar
unfamiliar
risks
risks
RiskRisk
spill-over
Macro-economy: threat of recession in the US, and
markets:
markets:
not not
pricing
pricing
recession
recession
riskrisk
Equity
Equity
management
techniques:
inadequate
to deal with unfamiliar risks
Risk
trader:
trader:
newnew
focus
focus
post-Socit
post-Socit
Gnrale
Gnrale
Rogue
Rogue
markets:
not
pricing
recession
risk
Equity
incentives:
incentives:
badly
badly
structured
structured
and
and
a contributor
a contributor
to the
to the
crisis
crisis
Management
Management
new focus
post-Socit
Gnrale
Rogue trader:
Management incentives: badly structured and a contributor to the crisis
DOWN
DOWN
much
much
regulation:
regulation:
overtaken
overtaken
by more
by more
urgent
urgent
concerns
concerns
TooToo
DOWN
rates:
rates:
the
the
big big
moves
moves
maymay
be over
be
Interest
Interest
much
regulation:
overtaken
byover
more urgent concerns
Too
prices
maymay
have
have
peaked
peaked
Commodities:
Commodities:
rates:
the
big
moves
may be over
Interest prices
dependence
dependence
onprices
technology:
on technology:
banks
banks
have
have
no choice
no choice
HighHigh
may have
peaked
Commodities:
markets:
holding
holding
up
Emerging
Emerging
dependence
on up
technology:
banks have no choice
Highmarkets:
shocks:
shocks:
bigger
bigger
things
things
to worry
to
about
about
Political
Political
markets:
holding
upworry
Emerging
Political shocks: bigger things to worry about
Management
Management
Management
incentives
incentives
are
are
aa
incentives
are
fast-rising
fast-rising
risk
risk a
fast-rising risk
TheThe
rogue
rogue
trader
trader
(up(up
from
from
No No
27 to
27 No
to No
14)14)
made
made
a strong
a strong
andand
predictable
predictable
showing
showing
in the
in The
the
wake
wake
of the
oftrader
the
recent
recent
Socit
Gnrale
Gnrale
incident,
incident,
though
thisthis
is ais
risk
a risk
thatthat
will
will
rogue
(upSocit
from
No
27
to No
14)
made
athough
strong
and
predictable
showing
always
always
andand
go.the
go.Fraud
Fraud
(No(No
11)Gnrale
11)
heldheld
its incident,
its
place
place
as though
aashigh
a high
concern,
concern,
mainly
mainly
in come
thecome
wake
of
recent
Socit
this
is a risk
that will
because
because
technological
technological
complexity
makes
makes
harder
it harder
toplace
detect.
AnaAn
associated
associated
riskrisk
ismainly
is
always
come andcomplexity
go.
Fraud
(Noit11)
heldtoitsdetect.
as
high
concern,
the the
banks
banks
necessary
necessary
butbut
high
high
dependence
dependence
on on
technology
(No
15)15)
and
and
strains
strains
in the
inrisk
the is
because
technological
complexity
makes
it technology
harder to(No
detect.
An
associated
back
back
office
(up(up
from
from
No No
24but
to
24No
to No
19).
19).
the office
banks
necessary
high
dependence
on technology (No 15) and strains in the
back office (up from No 24 to No 19).
Concerns
Concerns
about
about
the the
quality
quality
of of
corporate
corporate
governance
governance
in in
banks
banks
have
have
eased
eased
considerably
considerably
(down
(down
from
from
No
8 to8 No
to of
No
16)corporate
16)
since
since
the the
days
days
of Sarbanes-Oxley
of Sarbanes-Oxley
and
the the
Concerns
about
theNoquality
governance
in banks and
have
eased
Higgs
Higgs
report.
report.
ButBut
a(down
fast-growing
a fast-growing
is the
is16)
the
structure
structure
management
of management
incentives
incentives
considerably
from Nothreat
8 threat
to No
since
theofdays
of Sarbanes-Oxley
and the
(up(up
from
from
Noreport.
No
26 26
to But
No
to No
17)
whose
whose
focus
focus
on on
short-term
short-term
gaingain
is seen
is seen
to be
to be
a major
aincentives
major
Higgs
a17)
fast-growing
threat
is the
structure
of
management
cause
cause
behind
behind
the
the
crisis.
crisis.
(up from No 26 to No 17) whose focus on short-term gain is seen to be a major
cause behind the crisis.
Among
Among
receding
receding
threats,
threats,
the the
most
most
striking
striking
is banking
is banking
market
market
over-capacity
over-capacity
(down
(down
from
from
No
No
17 17
toreceding
No
to No
26)26)
duedue
to the
to the
erosion
erosion
of bank
of is
bank
capital
capital
inmarket
the
in the
crisis.
crisis.
ForFor
similar
similar
Among
threats,
most
striking
banking
over-capacity
(down
reasons,
reasons,
competition
competition
from
from
new
entrants
(No(No
30)of30)
isbank
considered
is considered
unlikely.
unlikely.
from
No
17 to No
26)new
due
toentrants
the erosion
capital very
in very
the
crisis.
For similar
reasons, competition from new entrants (No 30) is considered very unlikely.

AA
breakdown
breakdown
A breakdown
of of
responses
of
responses
responses
shows
shows
shows
bankers
bankers
bankers
putting
putting
putting
greater
greater
greater
emphasis
emphasis
emphasis
onon
market
on
market
market
risks,
risks,
risks,
and
andand
non-bankers
non-bankers
non-bankers
onon on
weaknesses
weaknesses
weaknesses
in in bank
in bank
bank
management
management
management
and
andand
controls.
controls.
controls.
Geographically,
Geographically,
Geographically,
there
there
there
was
was
was
a strong
a strong
a strong
consensus
consensus
consensus
onon
the
on
themajor
the
major
major
risks:
risks:
risks:
liquidity,
liquidity,
liquidity,
credit
credit
credit
and
and
derivatives,
and
derivatives,
derivatives,
though
though
though
industrial
industrial
industrial
countries
countries
countries
focused
focused
focused
more
more
more
onon
the
on
the
risks
the
risks
risks
of of
recession
of
recession
recession
and
andand
regulatory
regulatory
regulatory
over-reaction
over-reaction
over-reaction
while
while
while
emerging
emerging
emerging
economies
economies
economies
were
were
were
concerned
concerned
concerned
about
about
about
access
access
access
to to
funding.
funding.
to funding.
How
How
How
well
well
well
prepared
prepared
prepared
are
are
are
banks
banks
banks
totohandle
tohandle
handle
these
these
these
risks?
risks?
risks?
Few
Few
Few
think
think
think
that
that
that
banks
banks
banks
are
are
are
well
well
well
prepared
prepared
prepared
tototo
handle
handle
handle
risk
risk
risk
WeWe
asked
We
asked
asked
respondents
respondents
respondents
to to
rank
to
rank
rank
thethe
preparedness
the
preparedness
preparedness
of of
their
of
their
their
own
own
own
and
and
other
and
other
other
institutions
institutions
institutions
to to to
handle
handle
handle
thethe
risks
the
risks
risks
they
they
they
identified.
identified.
identified.Only
Only
Only
a quarter
a quarter
a quarter
of of
them
of
them
them
said
said
said
they
they
they
were
were
were
well
well
well
prepared,
prepared,
prepared,
down
down
down
from
from
from
nearly
nearly
nearly
two
two
thirds
two
thirds
thirds
in in
thein
the
previous
the
previous
previous
survey.
survey.
survey.
However
However
However
only
only
only
four
four
four
perper
cent
per
cent
cent
said
said
poorly,
said
poorly,
poorly,
down
down
down
from
from
from
1414
per
14
per
cent
per
cent
cent
before.
before.
before.
The
The
majority
The
majority
majority
of of
respondents
of
respondents
respondents
said
said
mixed.
said
mixed.
mixed.
Bankers
Bankers
Bankers
were
were
were
more
more
more
bullish
bullish
bullish
than
than
than
non-bankers
non-bankers
non-bankers
and
and
regulators.
and
regulators.
regulators.
The
The
The
Banana
Banana
Banana
Skins
Skins
Skins
Index
Index
Index
5 5 5
4.54.54.5
Score
Score
Score
4 4 4
Equity
Equity
Equity
Liquidity
Liquidity
Liquidity
markets
markets
markets
Credit
Credit
Credit
riskriskrisk Too
Too
much
Too
much
much
regulation
regulation
regulation
3.53.53.5
Poor
Poor
risk
Poor
riskrisk
Derivatives
Derivatives
management
management
management Derivatives
3 3 3
2.52.52.5
Avg.
all
risks
Avg.
Avg.
of of
allof
all
risks
risks
19
1998
1998
9
20 8
2000
2000
0
20 0
2002
2002
0
20 2
2004
2004
0
20 4
2006
2006
0
20 6
0
20 8
2008
08
2 2 2
Top
Top
Top
risk
risk
risk
The
The
The
Banana
Banana
Banana
Skins
Skins
Skins
Index
Index
Index
isisat
isataata a
record
record
record
high
high
high
The
The
Banana
The
Banana
Banana
Skins
Skins
Skins
Index
Index
Index
tracks
tracks
tracks
responses
responses
responses
over
over
over
time
time
time
and
and
can
and
can
be
can
be
read
be
read
read
as as
anas
an
indicator
an
indicator
indicator
of of
anxiety
of
anxiety
anxiety
levels.
levels.
levels.
The
The
top
The
top
line
top
line
shows
line
shows
shows
thethe
average
the
average
average
score
score
score
given
given
given
to to
theto
the
top
the
top
risk
top
risk
over
risk
over
over
thethe
last
the
last
ten
last
ten
years,
ten
years,
years,
and
and
the
and
the
bottom
the
bottom
bottom
line
line
the
line
the
average
the
average
average
of of
allof
all
the
all
the
risks.
the
risks.
risks.
Both
Both
Both
lines
lines
lines
hithit
allhit
all-alltime
time
time
highs
highs
highs
in in
thein
the
current
the
current
current
survey,
survey,
survey,
anan
indication
an
indication
indication
of of
theof
the
exceptional
the
exceptional
exceptional
level
level
level
of of
anxiety
of
anxiety
anxiety
currently
currently
currently
gripping
gripping
gripping
thethe
markets.
the
markets.
markets.
The
The
course
The
course
course
of of
theof
the
index
the
index
index
over
over
over
thethe
last
the
last
decade
last
decade
decade
shows
shows
shows
thethe
finance
the
finance
finance
sector
sector
sector
emerging
emerging
emerging
in in
a in
a a
bullish
bullish
bullish
mood
mood
mood
from
from
from
thethe
late
the
late
1990s
late
1990s
1990s
butbut
running
but
running
running
into
into
the
into
the
frenzy
the
frenzy
frenzy
of of
theof
the
dot
the
dot
com
dot
com
com
crash
crash
crash
in in in
thethe
early
the
early
early
2000s.
2000s.
2000s.
Although
Although
Although
thethe
top
the
top
risk
top
risk
peaked
risk
peaked
peaked
in in
2000,
in
2000,
2000,
thethe
overall
the
overall
overall
anxiety
anxiety
anxiety
level
level
level
continued
continued
continued
to torise
to
risefor
rise
fortwo
for
twotwo
years
years
years
in inthe
in
themessy
the
messy
messy
aftermath.
aftermath.
aftermath.The
The
The
risk
riskrisk
level
level
level
then
then
then
subsided
subsided
subsided
as asstability
as
stability
stability
returned
returned
returned
to tothe
to
themarkets.
the
markets.
markets.
However
However
However
thethefirst
the
first
first
indications
indications
indications
of of of
anxiety
anxiety
anxiety
about
about
about
thethe
soundness
the
soundness
soundness
of of
theof
the
bull
the
bull
run
bull
run
appeared
run
appeared
appeared
in in
thethe
in2006
the
2006
2006
survey
survey
survey
with
with
with
a sharp
a sharp
a sharp
rise
rise
in
rise
in
thethe
inall-risk
the
all-risk
all-risk
index,
index,
index,
which
which
which
hashas
continued
has
continued
continued
with
with
with
thethe
present
the
present
present
poll.
poll.
poll.

Who
Whosaid
saidwhat
what
A breakdown
A breakdown
of of
thethe
toptop
tenten
responses
responses
by by
type
type
shows
shows
different
different
levels
levels
of of
concern.
concern.
Bankers
Bankers
1 1Liquidity
Liquidity
2 2Credit
Credit
riskrisk
3 3Credit
Credit
spreads
spreads
4 4Derivatives
Derivatives
5 5Macro-economic
Macro-economic
trends
trends
6 6Risk
Risk
mgt
mgt
techniques
techniques
7 7Equities
Equities
8 8Too
Too
much
much
regulation
regulation
9 9Interest
Interest
rates
rates
10 10Fraud
Fraud
Bankers,
Bankers,
observers
observersand
and
regulators
regulatorsagree
agree
ononthe
thebig
bigrisks,
risks,
but
butdiffer
differononthe
the
detail
detail
Bankers
Bankers
were
were
mainly
mainly
concerned
concerned
with
with
market
market
risks:
risks:
liquidity,
liquidity,
spreads,
spreads,
derivatives,
derivatives,
equities,
equities,
interest
interest
rates
rates
etc.etc. They
They
were
were
also
also
thethe
most
most
concerned
concernedamong
amongrespondent
respondentgroups
groupswith
with
over-regulation,
over-regulation,particularly
particularlya aknee-jerk
knee-jerk
response
responseto tothethecrisis.
crisis. They
Theywere
werelessless
inclined
inclinedthan
thanother
othergroups
groupsto toseeseepoor
poorriskrisk
management
managementas asa contributory
a contributorycause
causeof ofthethe
turmoil.
turmoil. They
Theyexpected
expectedfraud
fraudto toriseriseas as
conditions
conditions
worsened.
worsened. Looking
Looking
ahead,
ahead,
their
their
greatest
greatest
worry
worry
was
was
credit
credit
riskrisk
in in
what
what
they
they
saw
saw
as as
a difficult
a difficult
period
period
forfor
thethe
global
global
economy.
economy.
Observers
Observers
1 1Credit
Credit
riskrisk
2 2Liquidity
Liquidity
3 3Credit
Credit
spreads
spreads
4 4Risk
Risk
mgt
mgt
techniques
techniques
5 5Derivatives
Derivatives
6 6Macro-economic
Macro-economic
trends
trends
7 7Equities
Equities
8 8Commodities
Commodities
9 9Hedge
Hedge
funds
funds
10 10Management
Management
incentives
incentives
Observers
Observers
of of
thethe
banking
banking
scene
scene
differed
differed
from
from
bankers
bankers
by by
putting
putting
credit
credit
riskrisk
at at
thethe
toptop
of of
their
theirlist,list,reflecting
reflectingtheir
theirconcern
concernthatthatthethe
legacy
legacy
of of
thethe
crisis
crisis
will
will
be be
loan
loan
losses
losses
andand
damaged
damagedbanks.
banks. They
Theywere
werealso
alsomore
more
inclined
inclined
to to
seesee
internal
internal
bank
bank
failings
failings
as as
causes
causes
of of
thethe
crisis,
crisis,
such
such
as as
poor
poor
riskrisk
management
management
andand
perverse
perverse
incentives,
incentives,
andand
were
were
therefore
therefore
lessless
worried
worried
than
than
bankers
bankers
about
about
thethe
threat
threat
of of
over-regulation.
over-regulation. ButBut
they
they
shared
shared
bankers
bankers
concerns
concerns
about
about
thethe
poor
poor
economic
economic
outlook,
outlook,
andand
its its
implications
implications
forfor
markets.
markets.
Regulators
Regulators
1 1 Liquidity
Liquidity
2 2 Credit
Credit
riskrisk
3 3 Derivatives
Derivatives
4 4 Macro-economic
Macro-economic
trends
trends
5 5 Risk
Risk
mgt
mgt
techniques
techniques
6 6 Credit
Credit
spreads
spreads
7 7 Equities
Equities
8 8 Hedge
Hedge
funds
funds
9 9 Fraud
Fraud
10 10 Management
Management
incentives
incentives
Regulators
Regulators
toptop
concerns
concerns
were
were
similar
similar
to those
to those
of ofbankers
bankersandandobservers
observersof ofthethebanking
banking
scene:
scene:
liquidity,
liquidity,
credit
credit
risk,
risk,
derivatives,
derivatives,
andand
a a
difficult
difficult
economic
economic
outlook.
outlook.They
They
also
also
gave
gave
a a
high
high
score
score
to to
internal
internal
bank
bank
weaknesses
weaknesses
such
such
as asthethequality
qualityof ofriskriskmanagement
managementandand
incentive
incentive
structures.
structures. They
They
were
were
thethemost
most
concerned
concernedof ofthethethree
threegroups
groupsabout
aboutthethe
position
position
of of
hedge
hedge
funds
funds
andand
thethe
threat
threat
of of
fraud
fraud
post-Socit
post-Socit
Gnrale.
Gnrale.ButBut
they
they
saw
saw
lessless
riskrisk
of of
over-regulation,
over-regulation,
which
which
they
they
placed
placed
13th13
. th.

America
North
North America
11
22
33
44
55
66
77
88
99
10
10
America
America seems
seems
less
less worried
worried about
about
recession
recession than
than
other
other regions
regions
Credit
Credit risk
risk
Liquidity
Liquidity
Derivatives
Derivatives
Risk
Risk mgt
mgt techniques
techniques
Credit
Credit spreads
spreads
Commodities
Commodities
Macro-economic
Macro-economic trends
trends
Emerging
Emerging markets
markets
High
High dep
dep on
on technology
technology
Too
Too much
much regulation
regulation
Respondents
Respondents from
from North
North America
America ranked
ranked the
the
worsening
worsening credit
credit outlook
outlook as
as their
their top
top concern,
concern,
though
though worries
worries about
about liquidity
liquidity were
were not
not far
far
behind.
behind.
Other
Other market
market risks
risks included
included
derivatives,
derivatives, particularly
particularly structured
structured products,
products,
and
and commodities
commodities where
where they
they expected
expected more
more
volatility
volatility in
in oil
oil and
and gold.
gold. They
They also
also saw
saw risk
risk
management
management as
as aa weakness.
weakness. Although
Although much
much
of
of the
the rest
rest of
of the
the world
world feared
feared aa US
US recession,
recession,
North
North Americans
Americans scored
scored macro-economic
macro-economic risk
risk
lower
lower than
than other
other geographical
geographical areas.
areas. They
They
were
were also
also less
less worried
worried about
about over-regulation.
over-regulation.
Europe
Europe
11
22
33
44
55
66
77
88
99
10
10
Liquidity
Liquidity
Credit
Credit risk
risk
Credit
Credit spreads
spreads
Derivatives
Derivatives
Macro-economic
trends
Risk
Risk mgt
mgt techniques
techniques
Equities
Equities
Too
Too much
much regulation
regulation
Commodities
Commodities
Interest
Interest rates
rates
Eight
Eight of
of the
the European
European respondents
respondents top
top ten
ten
were
were market
market or
or credit
credit risks
risks where
where they
they saw
saw
considerable
considerable volatility
volatility ahead.
ahead.
This
This was
was
linked
linked to
to their
their strong
strong concern
concern about
about gridlock
gridlock
in
in the
the financial
financial markets
markets and
and the
the likelihood
likelihood of
of aa
US
US recession
recession with
with spillover
spillover in
in Europe.
Europe. They
They
were
were also
also concerned
concerned about
about poor
poor risk
risk
management
management in
in banks,
banks, and
and expected
expected to
to see
see
strong
strong regulatory
regulatory comeback
comeback as
as aa consequence
consequence
of
of the
the crisis.
crisis.
East
East European
European and
and Russian
Russian
banks
banks were
were particularly
particularly concerned
concerned about
about
access
access to
to funding,
funding, and
and its
its cost.
cost.
Asia
Asia Pacific
Pacific
11
22
33
44
55
66
77
88
99
10
10
Credit
Credit spreads
spreads
Liquidity
Liquidity
Too
Too much
much regulation
regulation
Equities
Equities
Credit
Credit risk
risk
Macro-economic
trends
Risk
Risk mgt
mgt techniques
techniques
Derivatives
Derivatives
Interest
Interest rates
rates
High
High dep
dep on
on technology
technology
The
The Asia
Asia Pacific
Pacific region
region reflected
reflected less
less concern
concern
about
about the
the economic
economic effects
effects of
of the
the crisis
crisis than
than
North
North America
America and
and Europe:
Europe: their
their markets
markets
seemed
seemed to
to be
be in
in better
better shape,
shape, though
though
respondents
respondents did
did not
not expect
expect them
them to
to escape
escape
unharmed.
unharmed. Access
Access to
to funding
funding was
was aa major
major
concern,
concern, particularly
particularly among
among emerging
emerging
economy
economy banks.
banks. Concern
Concern about
about derivatives
derivatives
and
and structured
structured products
products was
was relatively
relatively lower.
lower.
Japanese
Japanese and
and Australian
Australian banks
banks expected
expected to
to see
see
more
more regulation
regulation in
in response
response to
to the
the crisis.
crisis.

countries
Industrial
Industrial countries
Industrial
Industrial and
and
emerging
emerging
economies
economies share
share
concerns
concerns about
about
the
the outlook
outlook
11
22
33
44
55
66
77
88
99
10
10
Liquidity
Liquidity
Credit
Credit risk
risk
Credit
Credit spreads
spreads
Derivatives
Derivatives
Macro-economic
trends
Risk
Risk mgt
mgt techniques
techniques
Equities
Equities
Too
Too much
much regulation
regulation
Hedge
Hedge funds
funds
Commodities
Commodities
The
The interests
interests of
of industrial
industrial and
and emerging
emerging
economies
economies show
show more
more convergence
convergence in
in this
this
survey
survey than
than in
in previous
previous ones,
ones, mainly
mainly because
because
the
the crisis
crisis provides
provides aa strong
strong focus
focus for
for both
both
groups.
groups.
Both
Both are
are concerned
concerned with
with the
the
condition
condition of
of the
the financial
financial markets
markets and
and the
the
prospects
prospects for
for the
the world
world economy.
economy. Among
Among the
the
main
main differences
differences is
is aa higher
higher concern
concern in
in
industrialised
industrialised countries
countries about
about over-regulation
over-regulation
and
and the
the quality
quality of
of risk
risk management.
management.
Commodities
Commodities also
also featured
featured strongly
strongly since
since this
this
group
group included
included Canada
Canada and
and Australia.
Australia.
Emerging
Emerging economies
economies
11
22
33
44
55
66
77
88
99
10
10
Liquidity
Liquidity
Credit
Credit risk
risk
Derivatives
Derivatives
Macro-economic
trends
Equities
Equities
Credit
Credit spreads
spreads
Interest
Interest rates
rates
Risk
Risk mgt
mgt techniques
techniques
Fraud
Fraud
Currencies
Currencies
Emerging
Emerging economies
economies shared
shared industrial
industrial
countries
countries concerns
concerns about
about the
the state
state of
of the
the
financial
financial markets
markets and
and the
the economic
economic outlook.
outlook.
In
In particular,
particular, they
they focused
focused on
on what
what itit might
might
mean
mean for
for their
their access
access to
to funding
funding and
and its
its cost;
cost;
there
there was
was aa fear
fear that
that they
they would
would be
be shut
shut out.
out.
Their
Their concern
concern with
with currency
currency risk
risk reflected
reflected the
the
fact
fact that
that banks
banks are
are forced
forced by
by the
the shortage
shortage of
of
local
local funding
funding sources
sources to
to use
use foreign
foreign markets.
markets.
This
This group
group also
also saw
saw fraud
fraud as
as aa rising
rising risk.
risk.
Over-regulation
Over-regulation was
was less
less of
of aa concern.
concern.
The Top Ten Banana Skins 1996-2008

1996
1
2
3
4
5
6
7
8
9
10
Poor management
Bad lending
Derivatives
Rogue trader
Excessive competition
Emerging markets
Macro-economic threats
Back office failure
Technology foul-up
Fraud
1
2
3
4
5
6
7
8
9
10
Equity market crash

E-commerce
Asset quality
Grasp of new technology
High dependence on tech.
Banking market o-capacity
Merger mania
Economy overheating
Comp from new entrants
Complex fin. instruments
1
2
3
4
5
6
7
8
9
10
Too much regulation

Credit risk
Corporate governance
Derivatives
Hedge funds
Fraud
Currencies
Risk management techniques
2000
2005
1997
1
2
3
4
5
6
7
8
9
10
Poor management
EMU turbulence
Rogue trader
Excessive competition
Bad lending
Emerging markets
Fraud
Derivatives
New products
Technology foul-up
1
2
3
4
5
6
7
8
9
10
Credit risk
Macro-economy
Equity markets
Complex financial instruments
Business continuation
Domestic regulation
Insurance
Emerging markets
Banking market over-capacity
International regulation
1
2
3
4
5
6
7
8
9
10
Too much regulation

Credit risk
Derivatives
Commodities
Interest rates
Hedge funds
Emerging markets
Risk management
2002
2006
1998
1
2
3
4
5
6
7
8
9
10
Poor risk management

Y2K
Poor strategy
EMU turbulence
Regulation
Emerging markets
New entrants
Cross-border competition
Product mis-pricing
Grasp of technology
1
2
3
4
5
6
7
8
9
10
Complex financial instruments

Credit risk
Macro economy
Insurance
Business continuation
International regulation
Equity markets
Interest rates
Political shocks
1
2
3
4
5
6
7
8
9
10
Liquidity
Credit risk
Credit spreads
Derivatives
Risk management
Equities
Too much regulation
Interest rates
Hedge funds
2003
2008
Some Banana Skins come and go, some are hardy perennials. The Top Ten since
1996 show how concerns have changed over more than a decade. 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. This
years survey brought the focus sharply onto credit and market risks, and propelled
two new entrants to the top of the charts: liquidity and credit spreads.
10

1. Liquidity (-)
Bewilderment
Bewilderment at
at
the
the sudden
sudden crisis
crisis
onset
onset
The
The critical
critical shortage
shortage of
of liquidity
liquidity in
in the
the financial
financial markets
markets emerges
emerges as
as the
the top
top risk
risk
facing
facing the
the banking
banking industry
industry in
in this
this years
years Banana
Banana Skins
Skins survey.
survey. A
A measure
measure of
of its
its
dramatic
dramatic rise
rise is
is that
that itit did
did not
not even
even rank
rank in
in the
the last
last survey
survey undertaken
undertaken in
in 2006.
2006.
The
The director
director of
of international
international operations
operations at
at aa major
major US
US bank
bank said:
said: This
This is
is the
the
number
number one
one problem.
problem. Banks
Banks fail
fail from
from liquidity...everything
liquidity...everything else
else is
is aa share
share price
price
problem.
problem. James
James Prichard,
Prichard, head
head of
of market
market risk
risk at
at WestLBs
WestLBs London
London branch,
branch, said:
said:
Injections
Injections of
of cash
cash have
have not
not re-enabled
re-enabled liquidity
liquidity in
in the
the marketsMarkets
marketsMarkets will
will
remain
remain inefficient
inefficient and
and prices
prices distorted
distorted until
until new
new capital
capital is
is raised.
raised.
Much
Much of
of the
the commentary
commentary reflected
reflected the
the bewilderment
bewilderment that
that the
the liquidity
liquidity crunch
crunch has
has
caused
caused throughout
throughout the
the industry:
industry: the
the suddenness
suddenness of
of its
its onset,
onset, the
the shock
shock waves,
waves, the
the
feeling
feeling of
of helplessness
helplessness etcThe
etcThe vice-chairman
vice-chairman of
of aa London
London fund
fund management
management
group
group described
described itit as
as a
a desperate
desperate problem.
problem. He
He said:
said: It
It may
may feel
feel as
as though
though itit is
is
confined
confined to
to the
the money
money and
and debt
debt markets
markets now,
now, but
but the
the risk
risk is
is that
that itit will
will climb
climb out
out
into
into other
other areas
areas too.
too. The
The head
head of
of risk
risk at
at aa large
large UK
UK financial
financial group
group said:
said: The
The
entire
entire financial
financial system
system is
is now
now much
much more
more vulnerable
vulnerable to
to further
further shocks,
shocks, eg
eg aa deep
deep US
US
recession
recession with
with large
large scale
scale credit
credit defaults
defaults or
or aa major
major geopolitical
geopolitical event.
event.
The
The responses
responses touched
touched on
on many
many aspects
aspects of
of the
the crunch.
crunch.
Lack
Lack of
of risk
risk focus.
focus. Risk
Risk management
management
systems
systems and
and banking
banking regulations
regulations failed
failed
to
to anticipate
anticipate the
the devastating
devastating effect
effect of
of
the
the loss
loss of
of market
market liquidity.
liquidity. Capital
Capital
adequacy
adequacy rules
rules did
did not
not take
take sufficient
sufficient
account
account of
of liquidity
liquidity risk,
risk, and
and few
few banks
banks
had
had adequate
adequate defences
defences in
in place.
place. One
One
respondent
respondent said
said this
this was
was an
an issue
issue which
which
had
had been
been overlooked
overlooked by
by the
the industry
industry
until
until recently,
recently, and
and another
another described
described itit
as
as a
a forgotten
forgotten classic.
classic. (See
(See also
also No
No
29,
29, Too
Too little
little regulation).
regulation).
Markets
Markets stifled
stifled by
by
lack
lack of
of trust
trust
The
The perils
perils of
of growth
growth
The
The
current
current
credit
credit
crisis
crisis
emphasises
emphasises the
the vulnerability
vulnerability of
of the
the
banking
banking system
system to
to prolonged
prolonged
periods
periods of
of growth
growth well
well in
in excess
excess of
of
overall
overall GDP.
GDP.
Chief
Chief financial
financial officer
officer
US
US money
money centre
centre bank
bank
Collapse
Collapse of
of trust.
trust. Respondents
Respondents described
described the
the psychological
psychological effects:
effects: the
the loss
loss of
of
trust
trust among
among banks
banks and
and customers,
customers, the
the tendency
tendency for
for fears
fears to
to become
become self-fulfilling,
self-fulfilling,
the
the comfort
comfort taken
taken from
from general
general ignorance
ignorance -- all
all potentially
potentially leading
leading to
to aa downward
downward
spiral
spiral of
of confidence.
confidence. A
A senior
senior executive
executive with
with aa large
large Swiss
Swiss financial
financial group
group said:
said:
Its
Its the
the fear
fear of
of its
its loss
loss rather
rather than
than the
the actual
actual loss
loss that
that we
we need
need to
to manage.
manage. An
An
Irish
Irish respondent
respondent said
said that
that economic
economic growth
growth would
would be
be stifled
stifled by
by a
a lack
lack of
of trust
trust
between
between financial
financial institutions
institutions and
and an
an unwillingness
unwillingness to
to enter
enter into
into complex
complex financial
financial
arrangements
arrangements in
in the
the future.
future.
Funding.
Funding. The
The crunch
crunch has
has made
made funding
funding harder,
harder, even
even for
for healthy
healthy banks,
banks, and
and raised
raised
the
the possibility
possibility of
of bank
bank failure.
failure. (The
(The survey
survey was
was carried
carried out
out before
before the
the collapse
collapse of
of
Bear
Bear Stearns.)
Stearns.) The
The head
head of
of market
market risk
risk at
at aa large
large Australian
Australian bank
bank said:
said: Not
Not only
only
are
are increasing
increasing costs
costs playing
playing out,
out, but
but the
the fundamental
fundamental issue
issue of
of access
access to
to funds
funds could
could
be
be jeopardised
jeopardised by
by single
single name
name events
events and/or
and/or systemic
systemic perceptions.
perceptions. The
The likelihood
likelihood
of
of bank
bank failures
failures (or
(or bail-outs)
bail-outs) is
is high.
high. This
This issue
issue is
is set
set to
to persist
persist as
as the
the credit
credit crunch
crunch
widens.
widens. The
The funding
funding issue
issue is
is particularly
particularly acute
acute for
for smaller
smaller banks
banks and
and those
those in
in
outlying
outlying markets.
markets. A
A respondent
respondent from
from aa small
small UK
UK bank
bank said
said that
that many
many banks
banks are
are
still
still struggling.
struggling.
Banks
Banks from
from East
East Europe
Europe and
and Russia
Russia feared
feared for
for the
the availability
availability
and
and cost
cost of
of funding.
funding. A
A Polish
Polish bank
bank president
president faced
faced difficulties
difficulties acquiring
acquiring medium
medium
11

and long term financing in an environment of high risk premiums due to the global
financial situation. A Russian bank examiner said that banks from Russia and
countries of the former USSR have problems refunding bonds and syndicated
loans.
and
long term financing in an environment of high risk premiums due to the global
financial situation. A Russian bank examiner said that banks from Russia and
Valuation.of The
free-flowing
markets has
made itbonds
hard ifand
not impossible
countries
the absence
former of
USSR
have problems
refunding
syndicated
to value and unwind the complex deals lying at the heart of the crisis. A risk officer
loans.
at a large German bank highlighted the cost of the unwind/work-out of the risk on

bank books(i.e.
leveraged
loan inventory,
CMBS
inventory,
loans,
Valuation.
The absence
of free-flowing
markets
has made
it hard real
if notestate
impossible
SIV
assets
A complex
UK banker
that
theheart
greatest
felt Abyrisk
financial
to
value
and etc.).
unwind the
dealssaid
lying
at the
of therisk
crisis.
officer
institutions
remains
losses
associated
where forcedofsales
of the
at
a large German
bank
highlighted
thewith
cost SIVs/CDOs
of the unwind/work-out
the risk
on
underlying
assets are
creatingloan
a snowball
The director
regulatory
bank
books(i.e.
leveraged
inventory,effect.
CMBS inventory,
real of
estate
loans,
affairs
at a large
capital
markets
through
SIV
assets
etc.).UK bank
A UKpredicted
banker continued
said that the
greatest
riskdislocation
felt by financial
2008,
with
further
losses
on
structured
financial
products
and
spillover
effects
institutions remains losses associated with SIVs/CDOs where forced sales of into
the
other sectorsassets
and markets.
respondents
thought the
unwind,
underlying
are creatingMany
a snowball
effect.
Theprogress
directorofofthe
regulatory
or lackatofa it,
would
how continued
long the crisis
lasted,
and how
deep its
effect
affairs
large
UK determine
bank predicted
capital
markets
dislocation
through
wouldwith
be. In
any case,
theon
value
of many
of theseproducts
securitiesand
could
not be effects
determined
2008,
further
losses
structured
financial
spillover
into
until the
fate of
monoline insurers
was known.thought the progress of the unwind,
other
sectors
andthe
markets.
Many respondents
or lack of it, would determine how long the crisis lasted, and how deep its effect
felt that
strong
central
would be. In any case, the value of many ofSome
theserespondents
securities could
not be
determined
bank intervention may have averted a
until the fate of the monoline insurers was known.
Fear of the unknown
melt-down. I dont think it will get any
worserespondents
said the head
at a
Some
felt of
thatgroup
strongrisk
central
I am concerned about the
large
London
financial
group.
bank intervention may have avertedBut
a
unknown.
The unknown
growth in the
Fear
of
the
others urged Icaution.
John
Plender,
melt-down.
dont think
it will
get anya
finance
industry
has
been
columnist
thehead
Financial
Times,
said
worse
saidonthe
of group
risk at
a
enormous in comparison to the
Ireal
ameconomy.
concerned
about
the
that the
immediate
concern
is that But
the
I think
we dont
large
London
financial
group.
unknown.
The ramifications
growth in the
efforts urged
of the caution.
central banks
to arrest
understand the
of
others
Johnfail
Plender,
a
finance
industry
been
this. As a result, therehas
is a sense
the
loss
of
confidence,
and
that
there
are
columnist on the Financial Times, said
enormous
in
comparison
to
the
of foreboding which will have an
further
of financial
institutions
that
the failures
immediate
concern is
that the
real
we dont
impacteconomy.
on liquidityI inthink
the markets.
with systemic
consequences.
said
efforts
of the central
banks failMany
to arrest
understand the ramifications of
thatloss
while
banking
markets
had
stabilised
this.
As
a
result,
there
is
a
sense
the
of
confidence,
and
that
there
are
Michael Hamilton
a bit, the
knock-on
effects ininstitutions
areas like
of
foreboding
which will have an
further
failures
of financial
Managing
director
impact
liquidity in the markets.
credit,
structured
deals, property
finance
with
systemic
consequences.
Many
said
FinantiaonSecurities
and while
the banking
wider markets
economyhadwere
still
that
stabilised
Michael Hamilton
potentially
very damaging
and
longa
bit,
the
knock-on
effects
in
areas
like
Managing director
lasting.structured
The director
of credit
risk
credit,
deals, property
finance
Finantia Securities
management at a US money centre bank said
We
are
at
a
critical
juncture
with
no
and the wider economy were still
improvement in sight. Some respondents
predicted very
that the
crunch could
potentially
damaging
and spring
longback if there were further bank failures. lasting.
The director of credit risk
management at a US money centre bank said We are at a critical juncture with no
improvement in sight. Some respondents even predicted that the crunch could
spring back if there were further bank failures.
2. Credit risk (2)
The bursting of the

global credit
bubble
The
bursting of the
global credit
bubble
12
The risk of heavy credit losses came second but was ranked the fastest-rising risk as
What
they saw was an extended period of deteriorating credit quality with overstretched
borrowers,
banks
andcame
a worsening
economic
environment.
The
risk of weakened
heavy credit
losses
second but
was ranked
the fastest-rising risk as
respondents tried to look beyond the liquidity crunch for its consequences. What
Concern
credit
weakness
covered
a broad front.
consultant
David
they
saw about
was an
extended
period
of deteriorating
creditEconomic
quality with
overstretched
Kern said weakened
that swelling
could unleash
a environment.
vicious circle as ballooning
borrowers,
banksbad
anddebts
a worsening
economic
losses destroy bank capital, limit the banks' ability to lend, and worsen the credit
crunch. This
turn will
cause covered
new andabigger
losses, and
could trigger
a massive
Concern
aboutincredit
weakness
broad front.
Economic
consultant
David
Kern said that swelling bad debts could unleash a vicious circle as ballooning

losses
destroy
capital, limit
A glossary
of bank
abbreviations
is on the
pagebanks'
38. ability to lend, and worsen the credit
crunch. This in turn will cause new and bigger losses, and could trigger a massive
respondents
tried torisk
look beyond
2.
Credit
(2) the liquidity crunch for its consequences.

A glossary of abbreviations is on page ??44.

slump.
slump. A
A senior
senior economist
economist at
at aa large
large German
German bank
bank said
said that
that the
the bursting
bursting of
of the
the
transatlantic
transatlantic housing
housing and
and the
the global
global credit
credit bubbles
bubbles will
will remain
remain the
the key
key threat
threat to
to
financial
financial institutions.
institutions. After
After recent
recent events
events in
in the
the US,
US, UK
UK and
and Germany,
Germany, II expect
expect
problems
Respondents
problems now
now to
to increase
increase in
in Spain,
Spain, Italy
Italy and
and France.
France.
Respondents from
from East
East
Europe,
Russia,
the
Far
East
and
Australia
all
anticipated
trouble.
Europe, Russia, the Far East and Australia all anticipated trouble.
Some
Some of
of the
the strongest
strongest concern
concern was
was about
about consumer
consumer indebtedness:
indebtedness: the
the overheated
overheated
housing
housing market
market and
and sub-prime
sub-prime woes,
woes, as
as well
well as
as soaring
soaring credit
credit card
card debt.
debt. A
A senior
senior
US
US banker
banker said:
said: Consumers
Consumers are
are in
in worse
worse shape
shape than
than most
most observers
observers appreciate
appreciate and
and
will
will keep
keep increasing
increasing their
their debt
debt load
load until
until they
they literally
literally can
can borrow
borrow no
no more.
more. Then
Then
their
their failure
failure rate
rate will
will look
look like
like aa tsunami
tsunami to
to those
those lolly-gagging
lolly-gagging on
on the
the financial
financial
beaches.
Matthew
beaches.
Matthew Elderfield,
Elderfield, chief
chief executive
executive of
of the
the Bermuda
Bermuda Monetary
Monetary
Authority,
Authority, said:
said: The
The central
central concern
concern must
must be
be that
that sub-prime
sub-prime problems
problems extend
extend to
to
consumer
consumer credit
credit generally
generally in
in aa severe
severe manner
manner and
and that
that corporate
corporate credit
credit risk
risk also
also
increases,
increases, with
with chickens
chickens coming
coming home
home to
to roost
roost in
in highly
highly leveraged
leveraged private
private equity
equity
transactions.
transactions.
Corporates
Corporates are
are
more
more at
at risk
risk than
than
is
is generally
generally
thought
thought
Many
Many respondents
respondents challenged
challenged the
the view
view that
that corporate
corporate borrowers
borrowers were
were better
better
placed
placed to
to withstand
withstand aa credit
credit crunch
crunch than
than consumers.
consumers. Michael
Michael Feeny
Feeny of
of the
the Society
Society
of
of Technical
Technical Analysts
Analysts in
in London
London said
said that
that linkages
linkages between
between credit
credit markets
markets were
were
stronger
stronger than
than people
people realised.
realised. More
More of
of the
the bodies
bodies floating
floating to
to the
the surface
surface may
may turn
turn
out
out to
to be
be corporates
corporates than
than is
is currently
currently generally
generally expected.
expected. In
In fact
fact linkage
linkage was
was aa
widely-cited
A
widely-cited concern,
concern, particularly
particularly where
where itit had
had not
not been
been spotted.
spotted.
A senior
senior
executive
executive of
of aa large
large Swiss
Swiss financial
financial group
group warned
warned of
of unexpected
unexpected
interdependencies.
interdependencies.
Property
Property was
was aa big
big worry
worry in
in most
most
markets,
markets, particularly
particularly the
the AngloAngloSaxon.
Saxon. The
The director
director of
of regulatory
regulatory
affairs
affairs at
at aa UK
UK clearing
clearing bank
bank said
said that
that
commercial
commercial and
and residential
residential property
property
markets
markets are
are at
at best
best stagnating,
stagnating,
weakening
weakening the
the ability
ability to
to borrow
borrow and
and
reducing
reducing the
the quality
quality and
and quantity
quantity of
of
collateral.
Speaking
collateral.
Speaking for
for many
many UK
UK
mortgage
mortgage lenders,
lenders, Adrian
Adrian Coles,
Coles,
director-general
the
director-general of
of
the Building
Building
Societies
Societies Association,
Association, was
was concerned
concerned
about
credit
quality
in
about credit quality in aa deteriorating
deteriorating
housing
housing and
and commercial
commercial property
property
market.
Andrei
market.
Andrei Stepanenko,
Stepanenko, chief
chief
risk
risk officer
officer of
of Raiffeisen
Raiffeisen Bank
Bank in
in
Russia,
Russia, said
said that
that many
many banks
banks have
have aa
significant
significant exposure
exposure to
to residential
residential real
real
estate
estate under
under weak
weak loan
loan structures.
structures.
The
The new
new uncertainty
uncertainty
The
The continued
continued impact
impact of
of the
the
unwinding
unwinding of
of structured
structured financings
financings
and
and the
the lack
lack of
of pricing
pricing knowledge
knowledge
of
of these
these and
and derivatives;
derivatives; the
the
reassessment
reassessment of
of the
the use
use of
of
complex
derivatives
by
complex
derivatives
by
unsophisticated
unsophisticated people.
people. All
All these
these
will
will breed
breed uncertainty
uncertainty where
where there
there
has
has been
been brash
brash and
and unfounded
unfounded
certainty
certainty until
until now.
now.
Chris
Chris Prior-Willeard
Prior-Willeard
Vice-president
Vice-president
The
The Bank
Bank of
of New
New York
York Mellon
Mellon
Then
Then there
there are
are the
the banks
banks themselves
themselves where
where further
further large
large write-downs
write-downs are
are still
still
possible.
possible. Diane
Diane Coyle
Coyle of
of Enlightenment
Enlightenment Economics
Economics asked:
asked: Have
Have banks
banks yet
yet written
written
down
down all
all they
they will
will need
need to?
to? Will
Will this
this be
be on
on aa sufficiently
sufficiently large
large scale
scale to
to pose
pose aa
systemic
systemic threat?
threat? A
A related
related problem
problem is
is counterparty
counterparty risk
risk which
which has
has become
become
particularly
particularly hard
hard to
to assess
assess amid
amid all
all the
the turmoil.
turmoil. A
A New
New York
York investment
investment banker
banker
was
was concerned
concerned about
about the
the continued
continued impact
impact on
on markets
markets from
from credit
credit constraints
constraints and
and
lack
lack of
of information
information about
about counterparty
counterparty positions
positions and
and off
off balance
balance sheet
sheet exposures.
exposures.
13

3.3.
3. Credit
Credit
Creditspreads
spreads
spreads (-)
(-)
(-)
Like
Like
Like
Like
liquidity,
liquidity,
liquidity,
liquidity,
this
this
this
this
isisis
aisarisk
aarisk
risk
risk
which
which
which
which
came
came
came
came
out
out
out
out
ofof
of
of
nowhere
nowhere
nowhere
nowhere
and
and
and
and
caught
caught
caught
caught
many
many
many
many
people
people
people
people
unawares.
unawares.
unawares.
unawares.
Risk
Risk
Risk
Riskre-pricing
re-pricing
re-pricing
re-pricingisis
is
isaaaa
new
new
new
newchallenge
challenge
challenge
challengefor
for
for
for
banks
banks
banks
banks
Credit
Credit
Credit
Credit
spreads
spreads
spreads
spreads
variations
variations
variations
variations
inin
in
in
the
the
the
the
cost
cost
cost
cost
ofof
of
of
credit
credit
credit
credit
toto
to
to
different
different
different
different
classes
classes
classes
classes
ofof
of
of
borrower
borrower
borrower
borrower

create
create
create
create
opportunities
opportunities
opportunities
opportunities
forfor
for
for
banks
banks
banks
banks
toto
to
to
trade
trade
trade
trade
one
one
one
one
class
class
class
class
against
against
against
against
another.
another.
another.
another. The
The
The
The
sub-prime
sub-prime
sub-prime
sub-prime
bubble
bubble
bubble
bubble
compressed
compressed
compressed
compressed
these
these
these
these
spreads
spreads
spreads
spreads
asas
as
as
the
the
the
the
market
market
market
market
increasingly
increasingly
increasingly
increasingly
ignored
ignored
ignored
ignored
the
the
the
the
extra
extra
extra
extra
risk
risk
risk
risk
inin
in
in
low
low
low
low
class
class
class
class
credits.
credits.
credits.
credits.But
But
But
But
with
with
with
with
the
the
the
the
crunch,
crunch,
crunch,
crunch,
they
they
they
they
allall
all
all
sprang
sprang
sprang
sprang
apart
apart
apart
apart
again,
again,
again,
again,
throwing
throwing
throwing
throwing
price
price
price
price
calculations
calculations
calculations
calculations
into
into
into
into
disarray
disarray
disarray
disarray
and
and
and
and
hammering
hammering
hammering
hammering
the
the
the
the
value
value
value
value
ofof
of
of
assets
assets
assets
assets
structured
structured
structured
structured
around
around
around
around
them.
them.
them.
them.
Spreads
Spreads
Spreads
Spreads
have
have
have
have
now
now
now
now
become
become
become
become
a ameasure
aameasure
measure
measure
ofof
of
of
mistrust.
mistrust.
mistrust.
mistrust.
Much
Much
Much
Much
ofof
of
of
this
this
this
this
mistrust
mistrust
mistrust
mistrust
focuses
focuses
focuses
focuses
onon
on
on
the
the
the
the
banks
banks
banks
banks
themselves,
themselves,
themselves,
themselves,
and
and
and
and
onon
on
on
other
other
other
other
types
types
types
types
ofof
of
of
financial
financial
financial
financial
institutions
institutions
institutions
institutions
such
such
such
such
asas
as
as
hedge
hedge
hedge
hedge
funds
funds
funds
funds
and
and
and
and
private
private
private
private
equity
equity
equity
equity
houses.
houses.
houses.
houses.AA
A
UK
AUK
UK
UK
banker
banker
banker
banker
said
said
said
said
that
that
that
that
the
the
the
the
cost
cost
cost
cost
ofof
of
of
credit
credit
credit
credit
will
will
will
will
rise
rise
rise
rise
atat
at
aatatime
aatime
time
time
ofof
of
of
more
more
more
more
challenging
challenging
challenging
challenging
economic
economic
economic
economic
conditions.
conditions.
conditions.
conditions.
The
The
The
The
main
main
main
main
impact
impact
impact
impact
will
will
will
will
bebe
be
be
onon
on
on
refinancings
refinancings
refinancings
refinancings
and
and
and
and
M&A,
M&A,
M&A,
M&A,
creating
creating
creating
creating
further
further
further
further
strain
strain
strain
strain
onon
on
on
some
some
some
some
financial
financial
financial
financial
institutions
institutions
institutions
institutions
asas
as
as
their
their
their
their
stock
stock
stock
stock
ofof
of
of
lending
lending
lending
lending
becomes
becomes
becomes
becomes
less
less
less
less
attractive
attractive
attractive
attractive
and
and
and
and
more
more
more
more
difficult
difficult
difficult
difficult
toto
to
distribute.
todistribute.
distribute.
distribute.Many
Many
Many
Many
respondents
respondents
respondents
respondents
expected
expected
expected
expected
toto
to
see
tosee
see
see
financial
financial
financial
financial
institutions
institutions
institutions
institutions
fail.
fail.
fail.
fail.
An
An
An
Anend
end
end
endtoto
to
to
O&D?
O&D?
O&D?
O&D?
The
The
The
The
originate
originate
originate
originate
and
and
and
and
distribute
distribute
distribute
distribute
business
business
business
business
model
model
model
model
is is
bust;
is
isbust;
bust;
bust;
aa
new
aanew
new
new
one
one
one
one
needs
needs
needs
needs
toto
to
be
tobe
be
be
found.
found.
found.
found.
The
The
The
The
practice
practice
practice
practice
ofof
of
of
packaging
packaging
packaging
packaging
deals
deals
deals
deals
with
with
with
with
the
the
the
the
sole
sole
sole
sole
purpose
purpose
purpose
purpose
ofof
of
of
selling
selling
selling
selling
them
them
them
them
onon
on
on
toto
to
to
other,
other,
other,
other,
possibly
possibly
possibly
possibly
less
less
less
less
sophisticated,
sophisticated,
sophisticated,
sophisticated,
banks
banks
banks
banks
was
was
was
was
widely
widely
widely
widely
identified
identified
identified
identified
asas
as
as
a acentral
aacentral
central
central
cause
cause
cause
cause
ofof
of
of
the
the
the
the
crash.
crash.
crash.
crash.
Respondents
Respondents
Respondents
Respondents
described
described
described
described
it itas
ititas
as
as
irresponsible,
irresponsible,
irresponsible,
irresponsible,
intentionally
intentionally
intentionally
intentionally
confusing,
confusing,
confusing,
confusing,
and
and
and
and
nonnonnonnonproductive.
productive.
productive.
productive.One
One
One
One
said
said
said
said
that
that
that
that
while
while
while
while
it ithad
itithad
had
had
the
the
the
the
benefit
benefit
benefit
benefit
ofof
of
diffusing
ofdiffusing
diffusing
diffusing
risk,
risk,
risk,
risk,
it italso
ititalso
also
also
makes
makes
makes
makes
it ititit
very
very
very
very
hard
hard
hard
hard
toto
to
to
distinguish
distinguish
distinguish
distinguish
clearly
clearly
clearly
clearly
where
where
where
where
and
and
and
and
how
how
how
how
risks
risks
risks
risks
have
have
have
have
been
been
been
been
carved
carved
carved
carved
up,
up,
up,
up,
reallocated,
reallocated,
reallocated,
reallocated,
brought
brought
brought
brought
back
back
back
back
together;
together;
together;
together;
and,
and,
and,
and,
byby
by
by
the
the
the
the
same
same
same
same
token,
token,
token,
token,
makes
makes
makes
makes
it itimpossible
ititimpossible
impossible
impossible
toto
to
to
predict
predict
predict
predict
what
what
what
what
will
will
will
will
happen
happen
happen
happen
inin
in
moments
inmoments
moments
moments
ofof
of
stress.
ofstress.
stress.
stress.
A Asenior
AAsenior
senior
senior
European
European
European
European
regulator
regulator
regulator
regulator
said
said
said
said
there
there
there
there
was
was
was
was
now
now
now
now
aa
a
a
challenge
challenge
challenge
challenge
toto
to
to
the
the
the
the
industry
industry
industry
industry
toto
to
to
re-rerereengineer
engineer
engineer
engineer
their
their
their
their
business
business
business
business
models
models
models
models
inin
in
in
response
response
response
response
toto
to
to
pressure
pressure
pressure
pressure
onon
on
on
the
the
the
the
originate
originate
originate
originate
and
and
and
and
distribute
distribute
distribute
distribute
concept,
concept,
concept,
concept,
a aview
aaview
view
view
which
which
which
which
was
was
was
was
echoed
echoed
echoed
echoed
byby
by
by
a aJapanese
aaJapanese
Japanese
Japanese
bank
bank
bank
bank
supervisor
supervisor
supervisor
supervisor
who
who
who
who
said
said
said
said
the
the
the
the
objective
objective
objective
objective
now
now
now
now
was
was
was
was
toto
to
to
develop
develop
develop
develop
a anew
aanew
new
new
business
business
business
business
model
model
model
model
inin
in
order
inorder
order
order
toto
to
cope
tocope
cope
cope
with
with
with
with
accelerated
accelerated
accelerated
accelerated
innovation.
innovation.
innovation.
innovation.
Philip
Philip
Philip
Philip
Middleton,
Middleton,
Middleton,
Middleton,
a apartner
aapartner
partner
partner
ofof
of
of
Ernst
Ernst
Ernst
Ernst
& &&
Young,
&Young,
Young,
Young,
foresaw
foresaw
foresaw
foresaw
anan
an
an
end
end
end
end
toto
to
to
O&D.
O&D.
O&D.
O&D.This
This
This
This
will
will
will
will
probably
probably
probably
probably
lead
lead
lead
lead
financial
financial
financial
financial
services
services
services
services
into
into
into
into
one
one
one
one
ofof
of
its
ofits
its
its
periodic
periodic
periodic
periodic
bouts
bouts
bouts
bouts
ofof
of
introspection
ofintrospection
introspection
introspection
and
and
and
and
asas
as
as
aa
result
aaresult
result
result
probably
probably
probably
probably
towards
towards
towards
towards
aa
period
aaperiod
period
period
ofof
of
greater
ofgreater
greater
greater
stability.
stability.
stability.
stability.
Too
Too
Too
Toomany
many
many
many
institutions
institutions
institutions
institutionsdont
dont
dont
dont
know
know
know
knowwhat
what
what
whatthey
they
they
they
have
have
have
have
14
Part
Part
Part
Part
ofof
of
of
the
the
the
the
difficulty
difficulty
difficulty
difficulty
lies
lies
lies
lies
inin
in
in
putting
putting
putting
putting
a arealistic
aarealistic
realistic
realistic
value
value
value
value
onon
on
on
credit
credit
credit
credit
assets.
assets.
assets.
assets.AA
A
respondent
Arespondent
respondent
respondent
from
from
from
from
a alarge
aalarge
large
large
US
US
US
US
bank
bank
bank
bank
said
said
said
said
that
that
that
that
accounting
accounting
accounting
accounting
standards
standards
standards
standards
were
were
were
were
demonstrating
demonstrating
demonstrating
demonstrating
that
that
that
that
too
too
too
too
many
many
many
many
institutions
institutions
institutions
institutions
don't
don't
don't
don't
know
know
know
know
what
what
what
what
they
they
they
they
have.
have.
have.
have. Inexperienced
Inexperienced
Inexperienced
Inexperienced
seniors,
seniors,
seniors,
seniors,
panicking
panicking
panicking
panicking
politicians
politicians
politicians
politiciansand
and
and
andpressured
pressured
pressured
pressuredregulators
regulators
regulators
regulatorsmay
may
may
maycause
cause
cause
causefinancial
financial
financial
financialinstitutions
institutions
institutions
institutionstoto
to
tomake
make
make
make
injudicious
injudicious
injudicious
injudicious
firesale
firesale
firesale
firesale
decisions.
decisions.
decisions.
decisions.
The
The
The
The
question
question
question
question
isisis
whether
iswhether
whether
whether
this
this
this
this
process
process
process
process
ofof
of
of
repricing
repricing
repricing
repricing
isisis
over,
isover,
over,
over,
oror
or
or
whether
whether
whether
whether
there
there
there
there
are
are
are
are
more
more
more
more
shocks
shocks
shocks
shocks
toto
to
to
come.
come.
come.
come.Most
Most
Most
Most
respondents
respondents
respondents
respondents
thought
thought
thought
thought
that
that
that
that
spreads
spreads
spreads
spreads
would
would
would
would
remain
remain
remain
remain
volatile
volatile
volatile
volatile
forfor
for
for
some
some
some
some
time.
time.
time.
time.AA
A
German
AGerman
German
German
bank
bank
bank
bank
adviser
adviser
adviser
adviser
said:
said:
said:
said:
Credit
Credit
Credit
Credit
was
was
was
was
too
too
too
too
cheap
cheap
cheap
cheap
and
and
and
and
until
until
until
until
itsits
its
its
cost
cost
cost
cost
reaches
reaches
reaches
reaches
reasonable
reasonable
reasonable
reasonable
levels,
levels,
levels,
levels,
spread
spread
spread
spread
volatility
volatility
volatility
volatility
isisis
aisamajor
aamajor
major
major
risk.
risk.
risk.
risk.
There
There
There
There
isisis
too
istoo
too
too
much
much
much
much
credit
credit
credit
credit
risk
risk
risk
risk
onon
on
on
the
the
the
the
balance
balance
balance
balance
sheets
sheets
sheets
sheets
toto
to
to
hedge.
hedge.
hedge.
hedge. AA
A
respondent
Arespondent
respondent
respondent
from
from
from
from
London
London
London
London
said
said
said
said
there
there
there
there
was
was
was
was

more
widening
to to
come,
followed
at at
more
widening
come,
followed
some
point
by by
a sharp
reversal.
some
point
a sharp
reversal. A A
respondent
respondentfrom
froma large
a largeSwiss
Swissbank
bank
said
thatthat
volatility
willwill
continue
to to
be be
said
volatility
continue
high
as as
investors
reprice
risk.
high
investors
reprice
risk.
Some
Somerespondents
respondentsthought
thoughtthetheworst
worst
waswaspast.
past. A Ariskriskofficer
officerat ata large
a large
German
bank
said
much
of of
thethe
move
German
bank
said
much
move
hashas
already
happened.
Others
saw
already happened.
Others
saw
volatility
volatilitypresenting
presentingopportunities
opportunitiesforfor
banks,
at least
forfor
those
with
thethe
capital
banks,
at least
those
with
capital
to take
advantage
of of
them.
to take
advantage
them.
AnAnobscure
obscureartart
Banking
hashas
become
thethe
artart
of of
Banking
become
increasing
returns
whilst
obscuring
increasing
returns
whilst
obscuring
risks.
TheThe
realignment
of these
risks.
realignment
of these
factors
hashas
begun
in ain a
factors
begun
tempestuous
fashion
andand
willwill
tempestuous
fashion
continue.
ButBut
in what
form?
continue.
in what
form?
Richard
Sayer
Richard
Sayer
Risk
manager
Risk
manager
Santander
Global
Markets
Santander
Global
Markets
Spain
Spain
4.4.Derivatives
Derivatives(3)
(3)
The
potential
forfor
derivatives
to to
cause
trouble,
particularly
in in
thethe
credit
default
The
potential
derivatives
cause
trouble,
particularly
credit
default
market,
remains
high.
market,
remains
high.
Will
Willcredit
credit
derivatives
derivativeswork
work
when
whenthey
theyare
are
needed?
needed?
There
were
several
worries:
thethe
banks
exposure,
thethe
potential
forfor
non-performance
There
were
several
worries:
banks
exposure,
potential
non-performance
by by
weakened
counterparties,
turmoil
in in
back
offices,
andand
thethe
sheer
complexity
of of
weakened
counterparties,
turmoil
back
offices,
sheer
complexity
unresolved
deals
based
on on
derivatives.
unresolved
deals
based
derivatives.
Collateralised
debt
obligations
(CDOs)
built
on on
sub-prime
mortgages
loomed
large
Collateralised
debt
obligations
(CDOs)
built
sub-prime
mortgages
loomed
large
as as
a concern,
along
with
credit
default
swaps
which
areare
supposed
to to
offer
protection
a concern,
along
with
credit
default
swaps
which
supposed
offer
protection
in in
a credit
crisis.
thethe
director
of of
compliance
at aat large
UKUK
bank
asked:
Will
a credit
crisis.ButBut
director
compliance
a large
bank
asked:
Will
credit
derivatives
work
when
they
areare
needed?
credit
derivatives
work
when
they
needed?
The
absence
of of
liquidity
in in
many
areas
of of
thethe
market
including
Over
The
Counter
The
absence
liquidity
many
areas
market
including
Over
The
Counter
(OTC)
made
it impossible
to to
value
deals
andand
therefore
calculate
exposures.
(OTC)
made
it impossible
value
deals
therefore
calculate
exposures.This
This
meant
thatthat
banks
could
notnot
unwind
their
positions,
or or
would
be be
forced
to to
mark
them
meant
banks
could
unwind
their
positions,
would
forced
mark
them
down.
Many
values
depended
on on
riskrisk
insurance
provided
by by
monoline
insurers
who
down.
Many
values
depended
insurance
provided
monoline
insurers
who
were
themselves
under
stress.
One
respondent
said
that
the
markets
were
were themselves under stress. One respondent said that the markets were
snookered
by by
thethe
monoline
problem.
Another
said
thatthat
the
receding
tidetide
willwill
snookered
monoline
problem.
Another
said
the
receding
leave
a lot
of of
naked
swimmers.
leave
a lot
naked
swimmers.
There
were
chinks
of of
light.
London-based
respondent
saw
more
market
There
were
chinks
light.One
One
London-based
respondent
saw
more
market
liquidity
moving
into
derivative
instruments.
On
the
plus
side,
they
have
kept
liquidity moving into derivative instruments. On the plus side, they have
kept
trading,
on on
thethe
minus
side
they
build
long-tail
counterparty
riskrisk
andand
thethe
CDS
market
trading,
minus
side
they
build
long-tail
counterparty
CDS
market
in in
particular
hashas
notnot
gone
through
a downturn
yet.
thethe
chief
riskrisk
officer
of of
a a
particular
gone
through
a downturn
yet.ButBut
chief
officer
large
Japanese
bank
said
thatthat
thethe
markets
face
a long
adjustment
process
because
of of
large
Japanese
bank
said
markets
face
a long
adjustment
process
because
thethe
sub-prime
issue.
sub-prime
issue.
Many
Manyrespondents
respondentssaid
saidthatthatfewfewpeople
peoplereally
reallyunderstood
understoodhow
howthese
thesemarkets
markets
worked.
were
difficult
to to
value,
account
forfor
andand
understand.
andand
worked.They
They
were
difficult
value,
account
understand.Buffett
Buffett
Henry
Kaufman
may
be be
right,
said
one.
described
them
as as
weapons
of of
Henry
Kaufman
may
right,
said
one.Another
Another
described
them
weapons
mass
financial
destruction.
mass
financial
destruction.
There
was
a different
story
from
Russia
where
bankers
said
thatthat
thethe
absence
of of
There
was
a different
story
from
Russia
where
bankers
said
absence
derivative
markets
spared
banks
these
risks,
though
thatthat
also
prevented
them
from
derivative
markets
spared
banks
these
risks,
though
also
prevented
them
from
hedging
exposures.
hedging
exposures.
15
Mark-to-market
Valuation rules which oblige banks to price their positions at their current market
value rather than at their book value were seen as a major part of the problem.
Respondents said the rules created a downward spiral which only made a bad
Mark-to-market
situation worse. One observed that this was causing significant pricing errors
and leeching market confidence, another that there is nowhere to hide, and
Valuation
rules
banks to price their positions at their current market
little or
no which
chanceoblige
of respite.
value rather than at their book value were seen as a major part of the problem.
Respondents
said the
rules created
a downward
spiral which
onlyAmade
a badcredit
UK accountant
Richard
Clarke described
the knock-on
effect.
monoline
situation
worse.
One observed
that this
was causing
significant
rating
is reduced,
mark-to-market
models
reduce the
values ofpricing
all theerrors
securities
and leeching
another that
thereofisallnowhere
to hide,
and are
supportedmarket
by the confidence,
monoline guarantee,
the value
the investors'
equities
little or
no chance
respite.
marked
down,ofthe
recoverability of all the investors' debts are marked down, the
monoline risk increases, the monoline is downgraded etc. Add on the impact on
UK accountant
Richard
Clarke described
the knock-on
effect.
A monoline
credit
pension deficits,
political/media
headlines
and there
is a general
collapse.
rating is reduced, mark-to-market models reduce the values of all the securities
supported
by the monoline
the value of all the
investors'
areissue
John Hitchins,
partner guarantee,
in PricewaterhouseCoopers,
said
that the equities
immediate
marked
the confidence
recoverability
of all the
investors'
debts
areare
marked
down,ofthe
is down,
restoring
in bank
balance
sheets
as we
in danger
talking
monoline
risk increases,
the monoline
downgraded
Add
the focus
impactbyonsenior
ourselves
into a downward
spiral.isThere
needs toetc.
be a
loton
more
pension
deficits, political/media
headlines
and there
is a general
collapse.
management
on the robustness
of valuation
processes
and risk
exposure.
John David
Hitchins,
partner
PricewaterhouseCoopers,
saidSecurities
that the immediate
issue
Rule,
chiefinexecutive
of the International
Lending Association,
is restoring
confidence
in
bank
balance
sheets
as
we
are
in
danger
of
talking
said this was the first time that credit losses have been primarily mark-to-market
ourselves
into Ita remains
downward
There
needs
to bethese
a lot more
by senior
losses.
to spiral.
be seen
what
relation
lossesfocus
will bear
to actual
management
on
the
robustness
of
valuation
processes
and
risk
exposure.
realised losses in future. My guess is that mark-to-market losses exhibit excess
volatility, perhaps meaning that firms are more likely to fail.
David Rule, chief executive of the International Securities Lending Association,
said this was the first time that credit losses have been primarily mark-to-market
losses. It remains to be seen what relation these losses will bear to actual
realised losses in future. My guess is that mark-to-market losses exhibit excess
volatility, perhaps meaning that firms are more likely to fail.
5. Macro-economic trends (14)

A vicious cycle of
financial and
industrial failure
A vicious cycle of
financial and
industrial failure
16
The world faces tough economic times. Respondents see a slowdown, led by the
US, possibly heading to a recession. A few even used the word depression. The
head of risk at a UK financial group said there was a real risk that the US will get
significantly worse with consequent effect on the global economy.
Another
respondent
a economic
vicious cycle
of financial
and industrial
failures.ledBanks
would
The world
faces saw
tough
times.
Respondents
see a slowdown,
by the
be both the
causetoofathe
downturnAthrough
tighter
anddepression.
the victimsThe
through
US, possibly
heading
recession.
few even
used lending
the word
conditions.
head worsening
of risk at acredit
UK financial
group said there was a real risk that the US will get
significantly worse with consequent effect on the global economy.
Another
The other
threat iscycle
inflation
following
central
bank intervention.
respondent
sawbig
a vicious
of financial
andmassive
industrial
failures.
Banks would The
headtheofcause
market
at a majorthrough
Australian
banklending
said this
createthrough
the need to
be both
of risk
the downturn
tighter
andwould
the victims
address
the inflation
issue further down the track. This may result in a poor credit
worsening
credit
conditions.
environment that persists over the next few years. Some respondents coupled the
threat big
of athreat
recession
to the risk
of rising
prices,central
and came
with stagflation.
The other
is inflation
following
massive
bankupintervention.
TheProf.
Goodhart
the London
School
Economics
Wethe
areneed
suspended
head Charles
of market
risk at aofmajor
Australian
bank of
said
this wouldsaid:
create
to
between
the dangers
outputdown
deflation
and price
inflation.
Theinmain
danger
address
the inflation
issueoffurther
the track.
This
may result
a poor
creditis that
the monetary
authorities
walkfew
thisyears.
tightropeSome
skilfully
enough.coupled the
environment
that persists
overfail
thetonext
respondents
threat of a recession to the risk of rising prices, and came up with stagflation. Prof.
Difficult
economic
were bound
to harm banks
driving
up loan losses,
Charles
Goodhart
of theconditions
London School
of Economics
said:by
We
are suspended
cutting
profitability
and forcing
cutbacks,
said.main
A senior
banker
between
the dangers
of output
deflation
and pricerespondents
inflation. The
danger UK
is that
saw a general
slowdown
in economic
activity
leading
to redundancies and lower
the monetary
authorities
fail to walk
this tightrope
skilfully
enough.
profits.
Difficult economic conditions were bound to harm banks by driving up loan losses,
Theprofitability
hope that the
be decoupled
from
that UK
of the
US was
cutting
and global
forcingeconomy
cutbacks,could
respondents
said. A
senior
banker
widely
pooh-poohed.
from Europe,
Africa and the
East all
saw a
general
slowdown inRespondents
economic activity
leadingAsia,
to redundancies
andFar
lower
profits.
5. Macro-economic trends (14)

The hope that the global economy could be decoupled from that of the US was
widely pooh-poohed. Respondents from Europe, Asia, Africa and the Far East all

expected
to to
feel
thethe
downdraft.
Europe,
a senior
bank
economist
said
that
expected
feel
downdraft. In In
Europe,
a senior
bank
economist
said
that
given
thethe
ECB's
hands-off
approach
to to
interest
rate
policy,
thethe
Euroland
economy
given
ECB's
hands-off
approach
interest
rate
policy,
Euroland
economy
is issetsetforfora amajor
majorslow-down,
slow-down,which
whichwill
willweaken
weakenfinancial
financialinstitutions.
institutions. In In
Australia,
Australia,thethechief
chieffinancial
financialofficer
officerof ofa alarge
largebank
banksaid
saidthat
thatalthough
althoughthethe
Australian
economy
remains
healthy,
there
is
clear
contagion
risk
from
Australian economy remains healthy, there is clear contagion risk fromglobal
global
capital
markets
or or
a global
domino
effect
recession.
Russia,
a banker
said
that
capital
markets
a global
domino
effect
recession.In In
Russia,
a banker
said
that
thethe
price
thethe
country
would
have
to to
paypay
forfor
its its
closer
integration
into
thethe
world
price
country
would
have
closer
integration
into
world
economy
was
greater
exposure
to to
foreign
shocks.
economy
was
greater
exposure
foreign
shocks.
Not
everybody
was
fullfull
of of
doom
andand
gloom.
respondent
said:
I I
amam
notnot
falling
Not
everybody
was
doom
gloom.One
One
respondent
said:
falling
into
line
with
conventional
wisdom.
that
thethe
economies
will
find
themselves
into
line
with
conventional
wisdom.I think
I think
that
economies
will
find
themselves
surprisingly
resilient
over
time.
surprisingly
resilient
over
time.
6.6.Risk
Riskmanagement
managementtechniques
techniques (10)
(10)
Poor
risk
management
clearly
made
a major
contribution
to to
thethe
credit
crunch,
hence
Poor
risk
management
clearly
made
a major
contribution
credit
crunch,
hence
thethe
riserise
in in
concern
about
thisthis
Banana
Skin.
Kubarych,
chief
USUS
economist
concern
about
Banana
Skin. Roger
Roger
Kubarych,
chief
economist
of of
UniCredit
Markets
andand
Investment
Banking
in in
New
York,
said:
Risk-taking
is is
UniCredit
Markets
Investment
Banking
New
York,
said:
Risk-taking
outoutof ofcontrol.
control.Guardians
Guardiansof ofthethesystem
system(boards
(boardsof ofdirectors,
directors,official
officialfinancial
financial
regulators,
rating
agencies,
auditors,
legal
advisers)
lack
thethe
tools
or or
thethe
authority
to to
regulators,
rating
agencies,
auditors,
legal
advisers)
lack
tools
authority
dodotheir
theirjobs.
jobs.Investors
Investorsarearelazy
lazyand/or
and/orcheap,
cheap,refusing
refusingto tododotheir
theirown
ownduedue
diligence.
diligence.
The
responses
threw
upup
many
themes.
The
responses
threw
many
themes.
The
Thebigger
biggerbanks
banks
are,
are,the
theworse
worse
their
theircontrols
controls
Controls.
sense
that
banking
is is
losing
its its
grip
is is
strong.
Warland
of of
Controls.The
The
sense
that
banking
losing
grip
strong. Philip
Philip
Warland
Halsey
HalseyConsulting
Consultingsaid
saidthat
thatrecent
recentevents
eventsreinforce
reinforceconcerns
concernsof ofhow
howanyany
CEO/board
CEO/boardcancanbe besatisfied
satisfiedthat
thatan an
institution
institutionis isbeing
beingrunrunappropriately
appropriately
from
toptop
to to
bottom.
Another
from
bottom.
Another
Look
Lookabove
abovethe
thetrees
trees
respondent
respondentsaid
saidthat
thatthethebigger
biggerbanks
banks
were,
the
worse
their
controls.
were, the worse their controls.
Although all major financial
From
FromCanada,
Canada,an anoperational
operationalrisk
risk
executive
said
that
whenever
wewe
touch
executive
said
that
whenever
touch
ourour
complex
house
of of
cards
wewe
risk
complex
house
cards
risk
upsetting
upsetting thethe balance
balance of of control
control
embedded
embedded in in thethe process
process or or
systemGiven
that
wewe
change
things
systemGiven
that
change
things
allallthethetime,
time,weweareareconstantly
constantlyfaced
faced
with
thisthis
exposure.
with
exposure.
Although all major financial

institutions
have
sophisticated
riskrisk
institutions
have
sophisticated
management
management systems
systems and
and
processes,
processes,what
whatseems
seemsto tobebe
missing
is is
anan
above
missing
abovethethetrees
trees
oversight
and
understanding
of the
oversight
and
understanding
of the
risks
being
taken.
There
seems
to to
risks
being
taken.
There
seems
bebe
a particular
need
forfor
thoughtful
a particular
need
thoughtful
stress
stress testing,
testing, both
both at at anan
enterprise
enterpriselevel
leveland
andononspecific
specific
positions
or or
exposures.
positions
exposures.
Authority.
Authority. The
Thepeople
peopleoverseeing
overseeing
Paul
Huyer
Paul
Huyer
risk
Senior
vice-president
riskmanagement
managementarearenotnotsufficiently
sufficiently
Senior
vice-president
TDTD
Bank
Financial
Group
senior.
Bank
Financial
Group
senior. Ernest
ErnestPatrikis,
Patrikis,partner
partnerof of
Canada
Pillsbury
Canada
PillsburyWinthrop
WinthropShaw
ShawPittman
Pittmanin in
New
York,
said
there
was
a need
forfor
New
York,
said
there
was
a need
top
top tiertier comprehensive
comprehensive risk
risk
managementThe
CEO,
COO,
andand
CFO
need
to to
be be
anan
active
part
of of
thethe
process.
managementThe
CEO,
COO,
CFO
need
active
part
process.
Without
that
level
of of
oversight,
thethe
organization
is is
at at
risk.
respondent
Without
that
level
oversight,
organization
risk. Another
Another
respondent
said
that
tootoo
many
CEOs
andand
CFOs
at at
global
institutions
have
demonstrated
in in
said
that
many
CEOs
CFOs
global
institutions
have
demonstrated
recent
recentmonths
monthsan anappalling
appallingignorance
ignoranceof ofthetherisks
risksimplicitly
implicitlyassumed
assumedbybytheir
their
institutions.
banker
said:
We
need
to to
getget
some
real
experience
back
in in
thethe
institutions. A A
banker
said:
We
need
some
real
experience
back
saddle.
saddle.
17

Investment. Although banks have invested heavily in risk management, they may
be tempted to cut back in a downturn. From a large rating agency a respondent said
that banks may now take their foot off the gas. In reality they should be building
on and consolidating the previous investment with a view to getting payback, but
other priorities will distract them from this. Fenner Christian, a director of Credit
Suisse in Switzerland, said that banks face conflicting pressures to reduce cost
while maintaining and improving the control environment.
Stress testing. While banks have risk
management procedures in place, they
do not stress test them against
sufficiently challenging scenarios.
John
Tattersall,
a
partner
of
PricewaterhouseCoopers in the UK,
said that institutions need to be
capable of adapting their risk
management
and
stress
testing
processes regularly to anticipate and
reflect changes in the markets as they
occur: those that fail to do so may
suffer in difficult times. Paul Domjan,
a director of consultants John Howell
and Co, said that weakness on this front
was due in part to regulators failure to
ensure meaningful compliance with
stress-testing requirements.
The shortcomings
Recent events have exposed
serious shortcomings in bank risk
management
models
and
processes. Unquestioning reliance
on secondary market liquidity
turns out to have been misplaced.
The securitization of loans and the
creation of complex derivative and
synthetic instruments, formerly
sources of liquidity, are now
sources of uncertainty that is
proving difficult to resolve.
Ambiguity in the transference of
risk, which banks formerly used to
their advantage, is now also being
punished by the markets.
US regulator
Catch up. Respondents said that risk

management had a tendency to lag
market developments, and was therefore bound to be caught on the hop. From the
Channel Islands a banker said that it has been made abundantly clear that risk
management systems have fallen behind the complexity of trading.
Several
respondents in Japan said that innovation was undermining risk management in their
country.
Models. Over-reliance on risk models which are inadequate, insufficiently rigorous
or out-of-date is a problem. The finance director of a large UK bank singled out
models which offer only expected value to a confidence level without highlighting
Managing information
The crisis has exposed weaknesses in managing information, particularly about
risk exposures. The chief auditor of a major US bank said: The complexity of
products, risk interdependencies and market volatility require just in time
digestible and predictive risk indicators. Many firms dont have this capability,
and this can inject credit, market and liquidity risk into the system.
The chief risk officer of a large Australian bank said that data integrity was a
key issue. Of primary concern is how risk is recorded and taken into account
when calculating client exposure records. Nicholas Hayes, senior consultant
for Europe to Automated Financial Systems, said that decision-oriented data
must be made available to management at all levels. Data quality remains
poor and accessible only with difficulty.
18
Risk
Risk
models
are
Riskmodels
modelsare
are
almost
almost
impossible
almostimpossible
impossible
for
for
staff
and
forstaff
staffand
and
regulators
regulators
regulatorstoto
to
understand
understand
understand
thethe
extent
extent
of of
tail
tail
risk.
risk.
Dutch
Dutch
bank
bank
director
director
said
said
that
that
Basel
Basel
2 allowed
22 allowed
banks
banks
to to
the
extent
of
tail
risk.A A
A
Dutch
bank
director
said
that
Basel
allowed
banks
to
make
make
their
their
own
own
risk
risk
calculations,
calculations,
and
and
thethe
temptation
temptation
was
was
to to
choose
choose
a risk
aa risk
model
model
that
that
make
their
own
risk
calculations,
and
the
temptation
was
to
choose
risk
model
that
was
was
too
too
optimistic.
optimistic.
any
any
case,
case,
hehe
added,
added,
risk
risk
models
models
were
were
only
only
understood
understood
byby
a aa
was
too
optimistic.In In
In
any
case,
he
added,
risk
models
were
only
understood
by
small
small
number
number
of of
staff
staff
and
and
almost
almost
impossible
impossible
forfor
regulators
regulators
to to
understand.
small
number
of
staff
and
almost
impossible
for
regulators
to understand.
understand.
However
However
some
some
bankers
bankers
saw
saw
these
these
risks
risks
receding
receding
because
because
banks
banks
were
were
certain
certain
to to
give
give
However
some
bankers
saw
these
risks
receding
because
banks
were
certain
to
give
risk
risk
management
management
a athorough
going-over
going-over
post-crisis.
post-crisis.
Others
feltfelt
that
that
banks
banks
risk
risk
risk
management
a thorough
thorough
going-over
post-crisis.Others
Others
felt
that
banks
risk
management
management
had
had
shown
shown
encouraging
encouraging
resilience
resilience
in in
many
many
cases.
cases.
management
had
shown
encouraging
resilience
in
many
cases.
7.7. Equities
Equities (12)
(12)
Are
Are
thethe
buoyant
buoyant
equity
equity
markets
markets
living
living
in in
Wonderland?
Wonderland?
The
sharp
sharp
rise
rise
in in
concern
concern
Are
the
buoyant
equity
markets
living
in
Wonderland? The
The
sharp
rise
in
concern
onon
this
this
front
front
suggests
suggests
that
that
thethe
answer
answer
may
may
bebe
yes.
yes.
The
head
head
of of
risk
risk
at at
a UK
aa UK
on
this
front
suggests
that
the
answer
may
be
yes. The
The
head
of
risk
at
UK
financial
financial
group
group
said
said
that
that
thethe
markets
markets
have
have
remained
remained
remarkably
remarkably
sanguine
sanguine
to to
thethe
risk
risk
financial
group
said
that
the
markets
have
remained
remarkably
sanguine
to
the
risk
of of
recession.
recession.
of
recession.
Many
Many
respondents
respondents
expected
expected
to to
seesee
equity
equity
markets
markets
become
become
more
more
volatile
volatile
as as
thethe
credit
credit
Many
respondents
expected
to
see
equity
markets
become
more
volatile
as
the
credit
crunch
crunch
fedfed
through
through
to to
the
real
real
world.
world.
banker
said
said
that
that
thethe
equity
equity
market
market
was
was
still
still
crunch
fed
through
to the
the
real
world.A A
A banker
banker
said
that
the
equity
market
was
still
heavily
heavily
overvalued
overvalued
vsvs
thethe
debt
debt
markets.
markets.
Others
questioned
questioned
whether
whether
thethe
equity
equity
heavily
overvalued
vs
the
debt
markets. Others
Others
questioned
whether
the
equity
markets
markets
had
had
priced
priced
in in
thethe
risk
risk
of of
recession,
recession,
even
even
depression,
depression,
or or
were
were
braced
braced
forfor
a aa
markets
had
priced
in
the
risk
of
recession,
even
depression,
or
were
braced
for
collapse
collapse
in in
stock
markets
markets
in in
emerging
economies.
economies.
collapse
in stock
stock
markets
in emerging
emerging
economies.
How
How
badly
badly
would
would
banks
banks
suffer
suffer
if if
there
was
was
a crash?
aa crash?
Some
Some
respondents
respondents
thought
thought
this
this
How
badly
would
banks
suffer
if there
there
was
crash?
Some
respondents
thought
this
was
was
a specific
aa specific
rather
rather
than
than
generalised
generalised
market
market
risk,
risk,
and
and
would
would
only
only
affect
affect
banks
banks
with
with
was
specific
rather
than
generalised
market
risk,
and
would
only
affect
banks
with
proprietary
proprietary
trading
trading
books.
books.
But
others
others
saw
saw
a crash
aa crash
having
having
a wide
aa wide
impact
impact
onon
banks
banks
proprietary
trading
books.But
But
others
saw
crash
having
wide
impact
on
banks
and
and
throwing
throwing
upup
massive
massive
correlation,
correlation,
quite
quite
apart
apart
from
from
adding
adding
to to
thethe
sense
sense
of of
and
throwing
up
massive
correlation,
quite
apart
from
adding
to
the
sense
of
economic
economic
gloom
gloom
and
and
making
making
it harder
itit harder
forfor
them
them
to to
raise
new
new
capital.
capital.
economic
gloom
and
making
harder
for
them
to raise
raise
new
capital.
8.8. Too
Toomuch
muchregulation
regulation (1)
(1)
Regulatory
Regulatory
excess,
which
topped
polls
two
previous
Banana
Skins
Regulatoryexcess,
excess,which
whichtopped
toppedthethe
thepolls
pollsin in
inthethe
thetwo
twoprevious
previousBanana
BananaSkins
Skins
surveys,
surveys,
yields
yields
first
first
place
place
this
this
year
year
to to
more
more
urgent
urgent
concerns
concerns
about
about
thethe
health
health
of of
thethe
surveys,
yields
first
place
this
year
to
more
urgent
concerns
about
the
health
of
the
financial
financial
system.
system.
financial
system.
Fears
Fears
knee
Fearsofof
ofa aaknee
knee
jerk
jerk
reaction
by
jerkreaction
reactionby
by
politicians
politicians
and
politiciansand
and
regulators
regulators
regulators
But
But
only
only
relatively.
relatively.
absolute
absolute
terms,
terms,
excessive
excessive
regulation
regulation
scored
scored
nearly
nearly
as as
much
much
But
only
relatively.In In
In
absolute
terms,
excessive
regulation
scored
nearly
as
much
as as
in in
the
previous
previous
survey
survey
(3.3
(3.3
onon
a scale
aa scale
as
in the
the
previous
survey
(3.3
on
scale
of of
time),
and
of1-51-5
1-5vsvs
vs3.53.5
3.5lastlast
lasttime),
time),and
andthethe
the
responses
responses
showed
that
regulatory
responses showed
showed that
that regulatory
regulatory
The
The
urge
regulate
Theurge
urgetoto
toregulate
regulate
overload
overload
is is
still
a huge
aa huge
concern
concern
in in
most
most
overload
is still
still
huge
concern
in
most
parts
parts
of of
thethe
world.
world.
But
thethe
focus
focus
hashas
parts
of
the
world.But
But
the
focus
has
In In
thethe
light
light
of of
what
what
has
has
happened
happened
In
the
light
of
what
has
happened
shifted
shifted
from
from
thethe
volume
volume
of of
regulation
regulation
shifted
from
the
volume
of
regulation
onon
sub-prime
and
associated
onsub-prime
sub-primeand
andassociated
associated
already
already
in in
place
place
to to
thethe
threat
threat
of of
extra
extra
already
in
place
to
the
threat
of
extra
problems,
problems,
there
there
willwill
bebe
a astrong
problems,
there
will
be
a strong
strong
regulation
regulation
toto
putput
things
things
right.
right.
regulation
to
put
things
right.
temptation
temptation
have
more
temptation to to
to have
have more
more
Many
Many
respondents
feared
that
there
Manyrespondents
respondentsfeared
fearedthat
thatthere
there
would
would
bebe
a knee
aa knee
jerk
jerk
reaction
reaction
to to
thethe
would
be
knee
jerk
reaction
to
the
crisis.
crisis.
The
director
international
crisis. The
Thedirector
directorof of
ofinternational
international
operations
operations
leading
bank
operationsat at
ata aaleading
leadingUSUS
USbank
bank
thought
thought
thethe
authorities
authorities
will
will
over-react
over-react
thought
the
authorities
will
over-react
to to
embarrassing
failures
tothethe
theembarrassing
embarrassingfailures
failuresof of
ofthethe
the
financial
financial
systems,
and
place
financialsystems,
systems,and
andputput
putin in
inplace
place
regulation.
regulation.
is
difficult
to to
argue
argue
regulation.It It
It is
is difficult
difficult
to
argue
against
against
circumstances,
againstit ititin in
inthethe
thecircumstances,
circumstances,
butbut
questionable
questionable
asas
to to
whether
whether
it itit
but
questionable
as
to
whether
will,
will,
if introduced,
ifif introduced,
bebe
effective.
effective.
will,
introduced,
be
effective.
Chairman
Chairman
Chairman
USUS
money
money
centre
centre
bank
bank
US
money
centre
bank
19

remedies that will take an already bad situation and make it worse.
In the
Netherlands, Gilbert Pluym, chief financial officer of Delta Lloyd Bankengroep,
warned of the prospect of strangling regulation.
Some feared that over-reaction would take regulation back to what a Japanese
respondent called a command and control environment and scupper attempts to
make regulation more principles-driven. Sebastian Schich, principal economist at
the OECD in Paris, said that post-crisis measures could mark a step back towards
the more traditional banking model in which institutions have less scope for
diversifying their risks. In Australia, a senior banker warned that over-regulation
would encourage a compliance as opposed to risk management mindset" and make
banks question the value of their investment in programmes like Basel. This will
lead to a sustained anti-risk management backlash when the current crisis is over,
he warned.
And so it went on, from many countries.
But to be fair on the regulators, a number of them also saw a risk of over-reaction,
including a top European regulatory official who warned against a knee jerk
response to recent failures in the industry.
Andrew Poprawa, president of the
Deposit Insurance Corporation of Ontario, blamed the overconfidence displayed by
major participants in the markets that regulators and central banks can control the
situation if a major loss of confidence in the system occurs.
Beyond these fears, the concerns expressed about over-regulation in earlier Banana
Skins surveys remain strong: its cost and clumsiness, the growth of compliance risk,
the impact on competition and innovation, the fact that those who create regulation
tend to measure it by size rather than quality, the moral hazard that transfers
management responsibility from bank to regulator A senior vice-president in a
Capital problems
Capital is under stress.
Commercial banks and most investment banks will
suffer heavy losses and will need significant new capital, said Prof. Willem Buiter
of the London School of Economics. But what to do about it? New capital is
expensive because the banks ratings are low, and if they do manage to raise it,
their rates of return will fall.
Andrew Mills, director of Insight Research in the UK, said that the banks
assumptions about their ability to raise capital could be severely tested. Aaron
Brown, risk manager at AQR Capital Management in the US, said that while some
banks were raising equity, it seems to be the minimum necessary to keep their
ratings, rather than an amount that would reassure customers.
An analyst with a global investment management firm said that banks capital
ratios (particularly in the UK) are not high and some may need recapitalisation. If
they do not recapitalise, then deleveraging will slow lending growth and
exacerbate a weak economic environment. It is unclear what will break this
downward spiral other than central bank support or liquidity injections from cashrich Asian economies.
However a US regulator was more upbeat. US banks entered this challenging
period with generally strong capital positions. Banks are moving quickly to
recognize losses and raise capital, which bodes well for their ability to overcome
these challenges over the intermediate term.
20

major
major
Canadian
Canadian
bank
bank
said
said
that
that
increasing
increasing
regulatory
regulatory
oversight
oversight
continues
continues
to to
cost
cost
major
Canadian
bank
said
that
increasing
regulatory
oversight
continues
to
cost
financial
financial
institutions
hundreds
millions
dollars,
Basel,
anti-money
financialinstitutions
institutionshundreds
hundredsofof
ofmillions
millionsofof
ofdollars,
dollars,i.e.i.e.
i.e.Basel,
Basel,anti-money
anti-money
laundering
laundering
and
and
antiantiterrorist
terrorist
financing.
financing.
laundering
and
antiterrorist
financing.
Basel
Basel
was
strong
focus
concern,
particularly
perceived
proBasel2 22was
wasa aastrong
strongfocus
focusofof
ofconcern,
concern,particularly
particularlyforfor
foritsits
itsperceived
perceivedproprocyclicality
cyclicality
- making
-- making
bad
bad
worse.
worse.
respondent
respondent
from
from
a large
aa large
Swiss
Swiss
bank
bank
said
said
this
this
cyclicality
making
bad
worse. A A
A
respondent
from
large
Swiss
bank
said
this
tendency
tendency
could
could
cause
cause
thethe
credit
credit
crunch
crunch
to to
continue.
continue.
bank
bank
chairman
chairman
said
said
that
that
tendency
could
cause
the
credit
crunch
to
continue. A A
A
bank
chairman
said
that
Basel
Basel
2 may
22 may
have
have
to to
bebe
revisited.
revisited.
Basel
may
have
to
be
revisited.
The
The
fall-out
from
Thefall-out
fall-outfrom
from
the
the
Northern
Rock
theNorthern
NorthernRock
Rock
fiasco
fiasco
fiasco
British
British
respondents
respondents
were
were
concerned
concerned
about
about
fall-out
fall-out
from
from
thethe
Northern
Northern
Rock
Rock
fiasco.
fiasco.
British
respondents
were
concerned
about
fall-out
from
the
Northern
Rock
fiasco.
The
The
director
director
ofof
regulatory
regulatory
affairs
affairs
at at
a large
aa large
UK
UK
clearing
clearing
bank
bank
said
said
that
that
events
events
would
would
The
director
of
regulatory
affairs
at
large
UK
clearing
bank
said
that
events
would
trigger
trigger
regulatory
regulatory
overkill
overkill
and
and
erroneous
erroneous
regulatory
regulatory
targetingin
targetingin
anan
attempt
attempt
to to
trigger
regulatory
overkill
and
erroneous
regulatory
targetingin
an
attempt
to
make
make
upup
forfor
thethe
regulatory
regulatory
failings
failings
ofof
2007.
2007.
Alexander
Hoare,
Hoare,
chief
chief
executive
executive
ofof
make
up
for
the
regulatory
failings
of
2007.Alexander
Alexander
Hoare,
chief
executive
of
C.C.
Hoare
Hoare
&&
Co,
Co,
saw
saw
regulatory
regulatory
knees
knees
jerking,
jerking,
being
being
caught
caught
byby
systemic
systemic
failure.
failure.
C.
Hoare
&
Co,
saw
regulatory
knees
jerking,
being
caught
by
systemic
failure.
The
The
managing
director
private
bank
said
that
knock-on
effect
could
Themanaging
managingdirector
directorofof
ofa aaprivate
privatebank
banksaid
saidthat
thatthethe
theknock-on
knock-oneffect
effectcould
could
materially
materially
change
retail
element
banking
sector
encouraging
materiallychange
changethethe
theretail
retailelement
elementofof
ofthethe
thebanking
bankingsector
sectorbyby
byencouraging
encouraging
depositors
depositors
to to
spread
spread
their
their
funds
funds
around
around
upup
to to
thethe
limit
limit
ofof
thethe
compensation
compensation
scheme,
scheme,
depositors
to
spread
their
funds
around
up
to
the
limit
of
the
compensation
scheme,
and
and
allowing
allowing
nationalised
nationalised
Northern
Northern
Rock
Rock
to to
offer
offer
peak
peak
prices.
prices.
and
allowing
nationalised
Northern
Rock
to
offer
peak
prices.
The
The
failure
failure
ofof
thethe
tripartite
tripartite
supervisory
supervisory
agreement
agreement
between
between
thethe
Treasury,
Treasury,
thethe
Bank
Bank
The
failure
of
the
tripartite
supervisory
agreement
between
the
Treasury,
the
Bank
ofof
England
England
and
and
thethe
FSA
FSA
to to
avert
avert
Northern
Northern
Rock
Rock
was
was
also
also
a concern.
aa concern.
professor
professor
ofof
of
England
and
the
FSA
to
avert
Northern
Rock
was
also
concern.A A
A
professor
of
banking
banking
said
said
that
that
if ifif
it itwas
impossible
impossible
to to
getget
three
three
UK
UK
institutions
institutions
to to
actact
quickly,
quickly,
banking
said
that
it was
was
impossible
to
get
three
UK
institutions
to
act
quickly,
such
such
arrangements
arrangements
are
are
notnot
worth
worth
thethe
paper
paper
they
they
areare
written
written
on.
on.
Bank
director
director
such
arrangements
are
not
worth
the
paper
they
are
written
on. Bank
Bank
director
David
David
Potter
Potter
feared
feared
that
that
thethe
government
government
would
would
compound
compound
thethe
disaster
disaster
by
by
giving
giving
David
Potter
feared
that
the
government
would
compound
the
disaster
by
giving
more
more
responsibility
responsibility
to to
thethe
wrong
wrong
leg,
leg,
i.e.i.e.
thethe
FSA.
FSA.
more
responsibility
to
the
wrong
leg,
i.e.
the
FSA.
Reflecting
Reflecting
onon
recent
recent
events,
events,
thethe
head
head
ofof
risk
risk
management
management
at at
a aleading
Australian
Australian
Reflecting
on
recent
events,
the
head
of
risk
management
at
a leading
leading
Australian
banking
banking
group
group
said
said
that
that
international
international
regulators
regulators
have
have
soso
farfar
done
done
anan
acceptable
acceptable
job,
job,
banking
group
said
that
international
regulators
have
so
far
done
an
acceptable
job,
butbut
it itis
hard
hard
to to
bebe
completely
completely
confident
confident
in in
thethe
regulatory
regulatory
response
response
to to
such
such
novel
novel
but
it is
is
hard
to
be
completely
confident
in
the
regulatory
response
to
such
novel
changes.
changes.
changes.
9.9. Interest
Interestrates
rates (5)
(5)
There
There
was
was
a marked
aa marked
fallfall
in in
thethe
ranking
ranking
ofof
this
this
Banana
Banana
Skin,
Skin,
despite
despite
unprecedented
unprecedented
There
was
marked
fall
in
the
ranking
of
this
Banana
Skin,
despite
unprecedented
central
central
bank
bank
activity
activity
onon
thethe
monetary
monetary
front.
front.
central
bank
activity
on
the
monetary
front.
Inflation
Inflation
would
be
Inflationwould
wouldbe
be
aa
cataclysmic
acataclysmic
cataclysmic
shock
shock
balance
shocktoto
tobalance
balance
sheets
sheets
sheets
Many
Many
respondents
respondents
feltfelt
that
that
interest
interest
rate
rate
volatility
volatility
had
had
peaked.
peaked.
Quite
a lot
aa lot
ofof
this
this
Many
respondents
felt
that
interest
rate
volatility
had
peaked.Quite
Quite
lot
of
this
hashas
already
already
happened,
happened,
said
said
a London
aa London
banker.
banker.
USUS
respondent
respondent
said
said
that
that
it it
was
has
already
happened,
said
London
banker. A A
A
US
respondent
said
that
it was
was
hard
hard
to to
seesee
thethe
volatility
volatility
trend
trend
here
here
rising
rising
much
much
after
after
thethe
last
last
sixsix
months,
months,
soso
I rate
II rate
hard
to
see
the
volatility
trend
here
rising
much
after
the
last
six
months,
so
rate
this
this
steady
steady
only
only
in in
relation
relation
to to
recent
recent
history.
history.
this
steady
only
in
relation
to
recent
history.
But
But
many
many
respondents
respondents
feltfelt
that
that
even
even
if if
the
immediate
immediate
outlook
outlook
was
was
steadier,
steadier,
renewed
renewed
But
many
respondents
felt
that
even
if the
the
immediate
outlook
was
steadier,
renewed
turbulence
turbulence
could
could
notnot
bebe
farfar
away
away
asas
inflation
inflation
began
began
to to
bite.
bite.
Swiss
Swiss
respondent
respondent
turbulence
could
not
be
far
away
as
inflation
began
to
bite. A A
A
Swiss
respondent
said
said
inflation
inflation
would
would
bebe
aa
cataclysmic
cataclysmic
shock
shock
to to
balance
balance
sheets.
sheets.
The
system
system
would
would
said
inflation
would
be
a
cataclysmic
shock
to
balance
sheets.The
The
system
would
struggle
struggle
to to
survive
survive
if ifif
interest
interest
rates
rates
rise
rise
to to
double
double
digits
digits
yet
that
that
would
would
bebe
thethe
struggle
to
survive
interest
rates
rise
to
double
digits
yet
yet
that
would
be
the
politically
politically
acceptable
acceptable
fixfix
to to
debt.
debt.
politically
acceptable
fix
to
debt.
Another
Another
respondent
said
that
interest
rates
mismatches
riskier
because
Anotherrespondent
respondentsaid
saidthat
thatinterest
interestrates
ratesmismatches
mismatchesareare
areriskier
riskierbecause
becausethethe
the
changes
changes
ofof
monetary
monetary
policy
policy
required
required
to to
deal
deal
with
with
thethe
dual
dual
problem
problem
ofof
slow
slow
growth
growth
changes
of
monetary
policy
required
to
deal
with
the
dual
problem
of
slow
growth
and
and
inflation
inflation
will
will
result
result
in in
interest
interest
rate
rate
volatility.
volatility.
and
inflation
will
result
in
interest
rate
volatility.
There
There
was
was
also
also
anxiety
anxiety
from
from
markets
markets
which
which
had
had
soso
farfar
been
been
spared
spared
direct
direct
shocks,
shocks,
forfor
There
was
also
anxiety
from
markets
which
had
so
far
been
spared
direct
shocks,
for
example
example
East
Europe,
emerging
markets
and
Far
East.
Tim
Foster,
chief
exampleEast
EastEurope,
Europe,emerging
emergingmarkets
marketsand
andthethe
theFar
FarEast.
East. Tim
TimFoster,
Foster,chief
chief
financial
financial
officer
officer
ofof
HBOS
HBOS
in in
Australia,
Australia,
saw
saw
thethe
Australian
Australian
market
market
moving
moving
outout
ofof
a aa
financial
officer
of
HBOS
in
Australia,
saw
the
Australian
market
moving
out
of
21

benign environment with rising interest rates and increasing credit risk.
Bankers in Hungary, Russia and Romania listed rising interest rates among their top
concerns.
10. Hedge funds (7)

Although hedge funds slipped a few places, this was because they were overtaken by
more pressing matters. Their overall score was almost identical to the previous year
(3.14 vs 3.15 on a scale of 1-5) and the comments showed that they still rank high as
a concern. These could be the next problem, said a bank chairman.
These could be
the next problem
Respondents pointed to their high leverage and opacity, their unregulated status
and their growing shareholder activism. Many wondered how safely hedge funds
would be able to unwind their deals if
the crisis continued, and what wider
damage they might cause in the
The shadow banks
process, particularly to investment
banks
with
prime
brokerage
Despite their importance for market
relationships and counterparty risk.
liquidity, hedge funds and other
unregulated entities are drivers
One respondent warned that it might
behind the so-called shadow
take some time for the full picture to
banking system whose unwinding is
emerge due to extended redemption
impacting the real economy. In
periods.
some parts of the financial system,
Even so, some responses sounded a less
anxious note. The chief risk officer of
a large German bank said this was still
a specific individual fund risk rather
than a generalised problem. A London
banker said that while they might
contribute to volatility, hedge funds
have something of an eye for absolute
value. Other respondents said that
they were a source of stability rather
than volatility and were curiously
well managed compared to the big
houses.
some parts of the financial system,

hedge funds have taken the role of
banks while not having the same
experience as traditional banks or
the regulation that banks have to
face. A higher degree of regulation
for hedge funds might be an answer
for the future.
Marco Feiten
Business Development
Dresdner Bank
Luxembourg
11. Fraud (11)

Recent events have sustained the risk of fraud, or at least its discovery. For
desperate people there is less to lose, more to conceal
Many respondents said that a pressured environment increased the incidence of
fraud both within a bank (traders needing to sustain performance) and outside
(customers needing to sustain credit). Tough times breed fraud said a respondent
from a large Swiss bank.
The director of compliance at a large UK bank said that
more existing frauds will come to light as the tide goes out.
22

But
But fraudsters
fraudsters are
are also
also becoming
becoming more
more clever.
clever. Financial
Financial complexity
complexity is
is on
on their
their
side,
side, as
as are
are the
the ever-swelling
ever-swelling sums
sums passing
passing through
through the
the system.
system. Controls
Controls are
are often
often
poor
poor and
and still
still not
not joined
joined up
up enough
enough to
to combat
combat fraud
fraud said
said aa respondent
respondent from
from the
the
payment
payment systems
systems industry.
industry. John
John Bullard
Bullard of
of IdenTrust,
IdenTrust, the
the identity
identity security
security service,
service,
said
said that
that banks
banks were
were not
not sufficiently
sufficiently equipped
equipped to
to combat
combat the
the growing
growing incidence
incidence of
of
cross-border
cross-border fraud
fraud in
in aa patchwork
patchwork of
of nation-state-based
nation-state-based infrastructure.
infrastructure.
Growing
E.Y.
Growing fraud
fraud was
was aa particular
particular problem
problem in
in Russia.
Russia.
E.Y. Rozanova,
Rozanova, chief
chief risk
risk
officer
officer of
of Energy
Energy Consulting,
Consulting, said
said that
that
increasing
increasing dependence
dependence on
on technology
technology
was
was heightening
heightening the
the risk
risk of
of theft
theft and
and
Fighting
Fighting the
the bad
bad guys
guys
business
business security.
security.
One
One of
of the
the risks
risks is
is the
the sheer
sheer cost
cost of
of
fighting
fighting fraud.
fraud. A
A risk
risk executive
executive from
from aa
South
South African
African bank
bank said
said that
that the
the cost
cost
of
of implementing
implementing new
new technology
technology to
to
counter
counter fraud
fraud in
in electronic
electronic payments
payments
and
and thus
thus present
present safe
safe payments
payments
infrastructure
infrastructure will
will become
become substantial.
substantial.
A
A Japanese
Japanese banker
banker pointed
pointed to
to the
the added
added
regulatory
regulatory costs
costs of
of crime
crime prevention.
prevention.
But
But is
is this
this aa battle
battle the
the banks
banks can
can win?
win?
Fraud
Fraud was
was always
always around
around even
even in
in the
the
best
best families,
families, said
said one
one respondent.
respondent.
The
The bad
bad guys
guys keep
keep getting
getting
smarter
smarter and
and better
better equipped.
equipped. We
We
need
need constant
constant diligence
diligence and
and
investment
investment in
in people
people and
and solutions
solutions
to
to fight
fight all
all kinds
kinds of
of fraud
fraud and
and
threats
threats to
to our
our data
data and
and our
our funds.
funds.
Im
Im not
not sure
sure we
we can
can invest
invest equal
equal
time
time and
and money
money to
to make
make progress
progress
commensurate
commensurate with
with the
the growth
growth of
of
the
the threat.
threat.
Vice-president
Vice-president
Operational
Operational risk
risk management
management
Canadian
Canadian bank
bank
12. Commodities (4)

The
The sense
sense that
that volatility
volatility in
in the
the commodity
commodity markets
markets may
may have
have peaked
peaked lay
lay behind
behind the
the
sharp
sharp fall
fall in
in this
this Banana
Banana Skin.
Skin.
A
A bigger
bigger than
than
usual
usual bust
bust on
on the
the
way?
way?
The
The question
question is
is what
what happens
happens next.
next. Several
Several respondents
respondents expected
expected commodity
commodity
prices
prices to
to fall
fall as
as steeply
steeply as
as they
they had
had risen.
risen. The
The flood
flood of
of hot
hot money
money into
into
commodities
commodities during
during the
the recent
recent boom
boom could
could be
be setting
setting up
up aa bigger
bigger than
than usual
usual bust,
bust,
said
said one.
one. The
The commodities
commodities most
most mentioned
mentioned as
as potentially
potentially volatile
volatile included
included gold,
gold,
oil
oil and
and agricultural
agricultural produce.
produce.
Sharp
Sharp falls
falls would
would damage
damage banks
banks which
which had
had exposure
exposure to
to commodity
commodity markets.
markets.
Richard
Richard Farrant,
Farrant, non-executive
non-executive director
director of
of Daiwa
Daiwa SMBC
SMBC Europe,
Europe, said
said that
that peak
peak oil
oil
is
is aa more
more immediate
immediate challenge
challenge than
than seems
seems to
to be
be generally
generally recognised.
recognised. When
When that
that
recognition
recognition comes,
comes, itit may
may act
act as
as another
another disruptive
disruptive influence
influence on
on markets.
markets. Some
Some
respondents
respondents thought
thought the
the impact
impact on
on banks
banks would
would be
be limited
limited because
because many
many of
of them
them
acted
acted as
as traders
traders and
and advisers
advisers rather
rather than
than investors.
investors. Most
Most of
of the
the shock
shock would
would be
be
borne
borne by
by speculators
speculators and
and hedge
hedge funds,
funds, and
and inexperienced
inexperienced players
players lured
lured by
by the
the
prospect
prospect of
of easy
easy gains.
gains. If
If banks
banks did
did suffer,
suffer, itit was
was likely
likely to
to be
be indirectly,
indirectly, through
through
the
the inflation
inflation pressures
pressures that
that surging
surging commodity
commodity prices
prices had
had created.
created.
Strongest
Strongest concern
concern about
about falling
falling commodity
commodity prices
prices came
came from
from banks
banks in
in Russia
Russia where
where
aa banker
banker said
said this
this risk
risk was
was not
not only
only to
to the
the banking
banking system,
system, but
but to
to the
the economy
economy
which
which is
is oriented
oriented to
to the
the export
export of
of raw
raw materials.
materials. Falling
Falling commodity
commodity prices
prices could
could
hurt
hurt exports
exports and
and currency
currency earnings,
earnings, putting
putting pressure
pressure on
on bank
bank liquidity
liquidity and
and interest
interest
rates.
rates.
23

13. Currencies (13)
The
The US
US dollar
dollar continues
continues to
to be
be the
the worry
worry here,
here, particularly
particularly with
with the
the divergence
divergence in
in
interest
interest rates
rates in
in the
the main
main currency
currency blocs.
blocs. Many
Many respondents
respondents felt
felt that
that volatility
volatility
would
would continue
continue for
for some
some time
time given
given the
the uncertain
uncertain political
political outlook
outlook in
in the
the US
US and,
and, as
as
one
one respondent
respondent put
put it,
it, a
a new
new Administration
Administration with
with promises
promises to
to keep.
keep. In
In the
the
Doomsday
Doomsday scenario,
scenario, dollar
dollar hegemony
hegemony is
is imperilled
imperilled and
and will
will end
end ifif either
either the
the
Middle
Middle East
East or
or China
China grows
grows weary
weary of
of financing
financing US
US deficits
deficits and
and militarism,
militarism, said
said
Kathleen
Kathleen Tyson-Quah,
Tyson-Quah, chief
chief executive
executive Granularity
Granularity Ltd.
Ltd. And
And as
as the
the dollar
dollar collapses,
collapses,
other
other currency
currency pegs
pegs could
could snap
snap and
and cause
cause wider
wider havoc.
havoc.
But
But the
the dollar
dollar was
was not
not the
the only
only focus
focus of
of concern.
concern. Canadians
Canadians and
and Australians
Australians
worried
worried about
about the
the strength
strength of
of their
their dollars
dollars hurting
hurting exports.
exports. In
In the
the EU,
EU, Neil
Neil Record,
Record,
chairman
chairman of
of Record
Record plc,
plc, aa currency
currency management
management firm,
firm, warned
warned of
of aa possible
possible break-up
break-up
of
of the
the Euro.
Euro. The
The very
very strong
strong Euro
Euro is
is making
making this
this ever
ever more
more likely
likely (or
(or rather
rather the
the
certainty
certainty of
of break-up
break-up aa little
little nearer),
nearer), he
he said.
said. East
East Europeans
Europeans feared
feared for
for the
the
stability
stability of
of their
their currencies
currencies because
because shortages
shortages of
of domestic
domestic funding
funding meant
meant that
that banks
banks
had
had become
become increasingly
increasingly exposed
exposed to
to currency
currency risk
risk by
by borrowing
borrowing abroad.
abroad.
Litigation
Litigation risk
risk
The
The messy
messy aftermath
aftermath of
of the
the credit
credit crunch
crunch increases
increases the
the risk
risk of
of expensive
expensive litigation
litigation
and
and class
class actions.
actions. AA senior
senior Swiss
Swiss banker
banker saw
saw the
the prospect
prospect of
of legal
legal pressures
pressures
and
and the
the finance
finance director
director of
of aa large
large UK
UK group
group warned
warned of
of litigation
litigation from
from badly
badly
originated,
originated, inadequately
inadequately described
described securities.
securities. Settlement
Settlement disputes
disputes in
in the
the
securitised
securitised debt
debt markets
markets were
were also
also expected.
expected.
Some
Some respondents
respondents predicted
predicted more
more litigation
litigation on
on the
the consumer
consumer front.
front. Ioannis
Ioannis
Alexopoulos,
Alexopoulos, aa partner
partner in
in DLA
DLA Piper,
Piper, saw
saw increased
increased awareness
awareness by
by
investors/consumers
investors/consumers of
of their
their rights
rights and
and problems
problems with
with products
products or
or practices
practices
leading
leading to
to increased
increased litigation.
litigation. Another
Another respondent
respondent warned
warned of
of consumer
consumer action
action
while
while bank
bank reputations
reputations are
are weak.
weak.
Paul
Paul Hattori
Hattori of
of Principal
Principal Consultancy
Consultancy in
in the
the UK
UK said
said the
the risk
risk was
was not
not just
just legal
legal
costs
costs but
but diversion
diversion of
of management
management time
time as
as sub-prime
sub-prime related
related litigation
litigation arises.
arises.
14. Rogue trader (27)

This
This one
one was
was bound
bound to
to shoot
shoot up
up the
the rankings,
rankings, but
but did
did Soc
Soc Gen
Gen throw
throw up
up anything
anything
new?
new?
Did
Did Soc
Soc Gen
Gen throw
throw
up
up anything
anything new?
new?
Many
Many respondents
respondents thought
thought not.
not. Here
Here was
was aa classic
classic case
case of
of management
management neglecting
neglecting
back
back office
office controls,
controls, failing
failing to
to understand
understand the
the complexities
complexities of
of the
the derivatives
derivatives
market,
The
market, allowing
allowing the
the sight
sight of
of profits
profits to
to cloud
cloud judgment.
judgment.
The director
director of
of
international
international operations
operations at
at aa large
large US
US bank
bank said
said that
that almost
almost always
always the
the rogue
rogue trader
trader
becomes
becomes aa mega-problem
mega-problem because
because of
of aa greedy
greedy management
management that
that turns
turns aa blind
blind eye
eye on
on
bad
bad practices.
practices.
Those
Those who
who saw
saw the
the risk
risk rising
rising noted
noted that
that the
the sums
sums involved
involved grow
grow with
with each
each rogue
rogue
trading
trading incident,
incident, and
and that
that the
the ever-increasing
ever-increasing complexity
complexity of
of finance
finance makes
makes rogue
rogue
traders
traders that
that much
much harder
harder to
to detect.
detect. One
One respondent
respondent wondered:
wondered: How
How many
many people
people
will
will be
be inspired
inspired by
by Kerviel
Kerviel rather
rather than
than deterred
deterred by
by the
the fact
fact that
that ultimately
ultimately he
he was
was
caught?
caught?
24

a number
respondents
thought
level
changed.They
They
said
ButBut
a number
of of
respondents
thought
thatthat
thethe
riskrisk
level
hadhad
notnot
changed.
said
rogue
trader
will
always
with
us,
will
always
hoodwink
thatthat
thethe
rogue
trader
will
always
be be
with
us,
will
always
trytry
to to
hoodwink
thethe
system,will
willalways
alwaysbe beable
ableto toexploit
exploit
system,
managements
lack
interest
back
managements
lack
of of
interest
in in
thethe
back
office. I I
would
have
given
same
office.
would
have
given
thethe
same
Theold
oldbanger
banger
The
rating
pre-Soc
Gen
said
Paul
Smee,
chief
rating
pre-Soc
Gen
said
Paul
Smee,
chief
executive
UKs
Payments
Council.
system
is ainmess.
a mess.Banks
Banks
executive
of of
thethe
UKs
Payments
Council.
TheThe
system
is in
have
been
over-leveraged
with
GermanIT ITconsultant
consultantthought
thoughtthatthat
have
been
over-leveraged
with
off-offA AGerman
balance
sheet
items
such
balance
sheet
items
such
as as
recent
events
don't
make
it more
likely,
recent
events
don't
make
it more
likely,
conduits
SIVs
a time
when
conduits
andand
SIVs
at aattime
when
I don't
much
evidence
gaps
butbut
I don't
seesee
much
evidence
thatthat
gaps
sub-prime
mortgages
have
been
sub-prime
mortgages
have
been
are
being
plugged
in
banks
other
than
Soc
are being plugged in banks other than Soc
done
to excess.
also
have
done
to excess.
WeWe
also
have
Gen,
seems
there.
Gen,
so so
thethe
riskrisk
stillstill
seems
to to
be be
there.
undercapitalised insurers of such
Some
even
thought
level
would
Some
even
thought
thethe
riskrisk
level
would
because
increased
attention
fallfall
because
of of
thethe
increased
attention
thatthat
management
would
now
give
area
management
would
now
give
to to
thisthis
area
for
a time
at least.One
One
said:
Soc
Gen
for
a time
at least.
said:
Soc
Gen
was
a wake
which
will
tighten
was
a wake
up up
callcall
which
will
tighten
controlsforfora awhile.
while.
Andsome
some
controls
And
regrettedthetheconsequences:
consequences:This
Thiswill
will
regretted
leadto tomore
moreregulation
regulationandandcost,
cost,
lead
according to to a a respondent
respondent from
from
according
Luxembourg.
Luxembourg.
undercapitalised insurers of such

debts.
With
a prospect
debts.
With
a prospect
of of
recession,
expect
recession,
wewe
cancan
expect
thethe
financial
sector
to behave
financial
sector
to behave
likelike
an an
engine
which
is short
of oil
oldold
carcar
engine
which
is short
of oil
at least
a couple
of years.
forfor
at least
a couple
of years.
Malcolm
Williamson
SirSir
Malcolm
Williamson
Chairman
Chairman
National
Australia
Bank
National
Australia
Bank
UKUK
andand
Clydesdale
Bank
Clydesdale
Bank
15.High
Highdependence
dependenceon
ontechnology
technology(6)
(6)
15.
Banks
highly
dependent
systems,
is clear.
what
risks?
Banks
areare
highly
dependent
onon
IT IT
systems,
thatthat
is clear.
ButBut
what
areare
thethe
risks?
Respondents
gave
varied
answers.One
One
was
simply
failure
leading
Respondents
gave
varied
answers.
was
simply
thethe
riskrisk
of of
failure
leading
to to
inability
to process,
monitor,
report
control,
said
a UK
respondent.
inability
to process,
monitor,
report
or or
control,
said
a UK
respondent.
thehuman
human
IsIsthe
beingmaking
makinga a
being
comeback?
comeback?
Another
technology
itself,
what
it cut
When
management
Another
riskrisk
laylay
notnot
in in
technology
itself,
butbut
what
it cut
out.out.When
management
tries
substitute
technology
experience
they
will
fail,
said
a respondent
from
tries
to to
substitute
technology
forfor
experience
they
will
fail,
said
a respondent
from
a a
large
bank. ButBut
a London
banker
thought
human
being
was
making
large
USUS
bank.
a London
banker
thought
thethe
human
being
was
making
a a
comeback.IfIf
anything,
people's
reliance
quantitative
assessments
comeback.
anything,
people's
reliance
on on
quantitative
assessments
of of
riskrisk
andand
value
reduced
a result
year.
value
hashas
reduced
as as
a result
of of
thethe
lastlast
year.
Another
was
scale.A A
respondent
said:
believe
will
increase
banks
Another
was
scale.
respondent
said:
I I
believe
thisthis
riskrisk
will
increase
as as
banks
upgrade
systems
create
points
where
transactions
become
highly
concentrated.
upgrade
systems
andand
create
points
where
transactions
become
highly
concentrated.
When
something
fails,
impacts
more
visible,
HSBC's
recent
problems
When
something
fails,
thethe
impacts
areare
more
visible,
eg eg
HSBC's
recent
problems
with
payment
systems.
with
its its
payment
systems.
And
then
there
was
management
comprehension. A A
respondent
said:
The
And
then
there
was
management
comprehension.
UKUK
respondent
said:
The
strategic
implications
technology
well
understood
at CEO
level.
I presume
strategic
implications
of of
technology
areare
notnot
well
understood
at CEO
level.
I presume
Terry
Leahy
understands
technology
implications
Tesco's
business.ImIm
Terry
Leahy
understands
thethe
technology
implications
forfor
Tesco's
business.
notnot
sure
how
many
financial
services
CEOs
I can
presume
same
for.
sure
how
many
financial
services
CEOs
I can
presume
thethe
same
for.
at the
day,
banks
have
alternative?One
One
respondent
said
ButBut
at the
endend
of of
thethe
day,
do do
banks
have
anyany
alternative?
respondent
said
thatthat
the
market
currently
divides
into
critical
groups:
those
have
invested
the
market
currently
divides
into
twotwo
critical
groups:
those
thatthat
have
invested
in in
technologyandandthose
thosethatthathave
havenotnotandandwill
willbe beadversely
adverselyselected
selectedas asmarket
market
technology
disruptions
continue
occur.Another
Another
said
nowhere
disruptions
continue
to to
occur.
said
thatthat
thisthis
hadhad
nowhere
to to
go go
butbut
up.up.
They
cannot
go
back
to
paper.
Im
not
sure
this
is
a
negative
thing,
however
They cannot go back to paper. Im not sure this is a negative thing, however
25
People
People
There
arent
enough
experienced
bankers
around.TheThe
good
times
have
There
justjust
arent
enough
experienced
bankers
around.
good
times
have
lasted
long
that
people
have
memory
of the
ones.
lasted
so so
long
that
fewfew
people
have
anyany
memory
of the
badbad
ones.
Philip
Wessels,
chief
officer
of Nedbank
in South
Africa,
said
that
main
Philip
Wessels,
chief
riskrisk
officer
of Nedbank
in South
Africa,
said
that
thethe
main
changed
cycle
that
favourable
conditions
riskrisk
is is
notnot
thethe
changed
cycle
perper
se se
butbut
thethe
factfact
that
thethe
favourable
conditions
have
lasted
a long
period,
resulting
in many
managers
having
seen
have
lasted
forfor
a long
period,
resulting
in many
managers
notnot
having
seen
or or
managed
a negative
cycle.
managed
a negative
cycle.
A consultant
said
there
was
lack
anybody
with
experience
even
A consultant
said
there
was
a a
lack
of of
anybody
with
experience
of of
even
moderately
recent
crises.
UBS
worldwide
employs
108
people
aged
moderately
recent
crises.
UBS
worldwide
employs
butbut
108
people
aged
5050
or or
more.
Banks
exposed
they
navigate
through
next
years.
more.
Banks
willwill
be be
exposed
as as
they
navigate
through
thethe
next
2/32/3
years.
Some
respondents
said
was
because
banks
older
people,
Some
respondents
said
thisthis
was
because
banks
gotgot
rid rid
of of
older
people,
butbut
banking
respondents
blamed
a tight
skills
market,
at least
until
recently.
There
banking
respondents
blamed
a tight
skills
market,
at least
until
recently.
There
was
a shortage
people
who
understood
advanced
derivative
instruments,
was
a shortage
of of
people
who
understood
advanced
derivative
instruments,
valuation
methodologies
exception
markers,
according
a respondent
valuation
methodologies
andand
exception
markers,
according
to to
a respondent
from
a large
investment
bank.
from
a large
USUS
investment
bank.
Australian
banker
said
that
having
right
people
in risk,
compliance
An An
Australian
banker
said
that
having
thethe
right
people
in risk,
compliance
andand
ORM
is
essential
and
competition
for
quality
staff
is
of
concern.
Staffing
ORM is essential and competition for quality staff is of concern. Staffing
problems
were
particularly
in outlying
markets
such
East
Europe
problems
were
particularly
riferife
in outlying
markets
such
as as
East
Europe
andand
thethe
emerging
world.
emerging world.
Some
respondents
feared
that
banks
would
now
repeat
their
mistakes
Some
respondents
feared
that
banks
would
now
repeat
their
mistakes
by by
letting
people
who
understood
complex
products
acquired
crisis
letting
go go
people
who
understood
complex
products
andand
hadhad
acquired
crisis
experience.
experience.
16.Corporate
Corporategovernance
governance (8)
(8)
16.
Concern
about
corporate
governance
fallen
sharply
since
days
which
Concern
about
corporate
governance
hashas
fallen
sharply
since
thethe
badbad
oldold
days
which
led
to
Sarbanes-Oxley
and
the
Higgs
Report.
In
2005,
this
Banana
Skin
ranked
led to Sarbanes-Oxley and the Higgs Report. In 2005, this Banana Skin ranked NoNo
3. 3.
Thequality
qualityofof
The
boards
stilla a
boards isisstill
worry
worry
2008,
responses
were
mixed.Many
Many
good
work
been
done. A A
ButBut
in in
2008,
responses
were
mixed.
feltfelt
thatthat
good
work
hadhad
been
done.
banker
described
a fairly
well
ploughed
furrow
already.The
The
chief
UKUK
banker
described
thisthis
as as
a fairly
well
ploughed
furrow
already.
chief
riskrisk
officer
a Polish
bank
said
issue
was
well
embedded,
Geneva,
Paul
officer
of of
a Polish
bank
said
thethe
issue
was
well
embedded,
andand
in in
Geneva,
Paul
Dembinski,
director
of
the
Observatoire
de
la
Finance,
thought
that
concern
was
Dembinski, director of the Observatoire de la Finance, thought that concern was
just
noise.
just noise.
others
there
was
work
done
some
areas.One
One
was
raising
ButBut
others
feltfelt
there
was
stillstill
work
to to
be be
done
in in
some
areas.
was
raising
thethe
quality
boards
ensure
directors
were
appropriately
qualified. Brandon
Brandon
quality
of of
boards
to to
ensure
thatthat
directors
were
appropriately
qualified.
Davies,
a director
Gatehouse
Capital
UK,
said
bank
boards
dont
have
Davies,
a director
of of
Gatehouse
Capital
in in
thethe
UK,
said
thatthat
bank
boards
dont
have
the
skills
in
a
very
challenging
environment.
A
respondent
from
a
large
the skills in a very challenging environment.
A respondent from a large
Australian
bank
said
the
current
environment
requires
strong
board
oversight.
Australian
bank
said
thatthat
the
current
environment
requires
strong
board
oversight.
Other
areas
concern
included
need
more
transparency
better
checks
Other
areas
of of
concern
included
thethe
need
forfor
more
transparency
andand
better
checks
balances
in the
corporate
power
structure.
andand
balances
in the
corporate
power
structure.
This
Banana
Skin
also
attracted
comment
from
regulatory
community.One
One
This
Banana
Skin
also
attracted
comment
from
thethe
regulatory
community.
EUEU
regulator
was
concerned
about
the
adequacy
board
oversight
positions
regulator
was
concerned
about
the
adequacy
of of
board
oversight
on on
riskrisk
positions
by by
management,Another
Another
said
there
should
more
focus
fraud
corruption
management,
said
there
should
be be
more
focus
on on
fraud
andand
corruption
managers.
by by
managers.
26

Some
respondents
pointed
to to
a looming
problem:
sovereign
wealth
funds.
Some
respondents
pointed
a looming
problem:
sovereign
wealth
funds.How
How
would
they
fit fit
into
thethe
western
corporate
governance
structure?
respondent
would
they
into
western
corporate
governance
structure? One
One
respondent
feltfelt
that
problems
could
be be
magnified
byby
their
growing
presence,
another
that
that
problems
could
magnified
their
growing
presence,
another
that
structures
might
be be
weakened.
structures
might
weakened.
17.
17.Management
Managementincentives
incentives(26)
(26)
This
risk
is is
upup
sharply
onon
thethe
view
that
ill-structured
reward
packages
contributed
This
risk
sharply
view
that
ill-structured
reward
packages
contributed
heavily
to to
thethe
credit
crunch.
heavily
credit
crunch.
Too
Toomany
manypigs
pigsatat
the
thetrough
trough
The
responses
The
responseswere
werecolourful.
colourful.Todays
Todayscrisis
crisisis isyesterdays
yesterdaysbonus.
bonus.Greed,
Greed,
greed,
greed....too
many
pigs
at at
thethe
trough.
cancer
in in
thethe
system.
greed,
greed....too
many
pigs
trough. AA
cancer
system. The
The
rotten
heart
of of
finance.
made
essentially
thethe
same
point:
one-way
incentives
rotten
heart
finance.AllAll
made
essentially
same
point:
one-way
incentives
push
bankers
to to
take
short-term
risks,
ignoring
real
profits
andand
sustained
growth.
push
bankers
take
short-term
risks,
ignoring
real
profits
sustained
growth.
Many
Manyalso
alsosaid
saidthat
thatnothing
nothingever
everchanged
changedhere,
here,despite
despiteregular
regularoutcries
outcriesandand
promises
to to
dodo
better.
promises
better.
Andrew
Freeman,
senior
expert
in in
McKinseys
risk
practice,
said
thisthis
was
Andrew
Freeman,
senior
expert
McKinseys
risk
practice,
said
wasthe
the
industry's
biggest
problem
andand
should
be be
thethe
principal
focus
of of
risk
management
industry's
biggest
problem
should
principal
focus
risk
management
efforts.
efforts. The
Thechairman
chairmanof ofa alarge
largebanking
bankinggroup
groupagreed.
agreed.AAnew
newpay
payforfor
performance
philosophy
is is
needed,
he he
said.
saw
thethe
risk
in in
thethe
form
of of
performance
philosophy
needed,
said. Some
Some
saw
risk
form
further
furtherpolitical/regulatory
political/regulatoryinterference
interferenceto tofix
fixthetheproblem.
problem.Others
Othersthought
thoughtit it
The
Thecurse
curseofofcomplexity
complexity
If one
theme
ranran
through
thethe
survey,
it was
complexity:
of products,
of systems,
If one
theme
through
survey,
it was
complexity:
of products,
of systems,
markets,
regulations.
is hampering
peoples
ability
to to
understand
markets,
regulations.Complexity
Complexity
is hampering
peoples
ability
understand
events,
to to
track
and
handle
risk,
to to
value
deals
- and,
at at
thethe
end
of of
thethe
day,
to to
events,
track
and
handle
risk,
value
deals
- and,
end
day,
manage.
is is
wonderful
onon
thethe
way
upup
because
it bamboozles
manage. Complexity
Complexity
wonderful
way
because
it bamboozles
markets,
butbut
terrible
onon
thethe
way
down
because
it obscures
thethe
dangers.
markets,
terrible
way
down
because
it obscures
dangers.
These
concerns
were
expressed
with
special
force
by by
non-bankers
who
saw
a a
These
concerns
were
expressed
with
special
force
non-bankers
who
saw
lack
of of
transparency
in in
banks,
lowlow
levels
of of
understanding,
and
regulators
lack
transparency
banks,
levels
understanding,
and
regulators
being
leftleft
behind
by by
over-innovative
markets.
being
behind
over-innovative
markets.
A UK
consultant
said:
There
is is
a looseness
of of
terminology
hiding
lack
of of
A UK
consultant
said:
There
a looseness
terminology
hiding
lack
understanding
of of
thethe
fundamental
facts
involved.
is is
exacerbated
by by
understanding
fundamental
facts
involved.This
This
exacerbated
misunderstanding
of of
credit/risk
gradings
by by
agencies,
particularly
of of
complex
misunderstanding
credit/risk
gradings
agencies,
particularly
complex
and
multilayered
SIVs,
and
credit
vehicles.
in in
Germany
said
and
multilayered
SIVs,
and
credit
vehicles. A respondent
A respondent
Germany
said
that
complexity
results
in in
poor
controls,
increased
likelihood
of of
fraud,
and
of of
that
complexity
results
poor
controls,
increased
likelihood
fraud,
and
data
protection
breaches.
data
protection
breaches.
ButBut
many
bankers
also
deplored
complexity.
Philippe
Moreels,
a director
of of
many
bankers
also
deplored
complexity.
Philippe
Moreels,
a director
CSOB,
thethe
largest
bank
in in
thethe
Czech
Republic,
said:
Banking
is becoming
so so
CSOB,
largest
bank
Czech
Republic,
said:
Banking
is becoming
complex
that
wewe
dodo
notnot
understand
it and
its its
risks
anyany
more,
nornor
is any
board
complex
that
understand
it and
risks
more,
is any
board
member
able
to to
actually
understand
thethe
whole
business
and
therefore
thethe
risks
member
able
actually
understand
whole
business
and
therefore
risks
associated
with
itEven
though
there
may
bebe
better
systems,
controls
etc.etc.
forfor
associated
with
itEven
though
there
may
better
systems,
controls
small
parts
of of
thethe
business,
thethe
sum
total
hashas
become
tootoo
complex
to to
follow
small
parts
business,
sum
total
become
complex
follow
and
thethe
necessary
know-how
tootoo
specialised,
unless
wewe
want
all all
bankers
to to
bebe
and
necessary
know-how
specialised,
unless
want
bankers
quantum
physics
graduates.
quantum
physics
graduates.
A Arespondent
respondentfrom
fromSingapore
Singaporesaid
saidthat
thatorganisationally
organisationallymost
mostbanks
banksnow
now
consisted
of of
multiple
fiefdoms
rather
than
a coherent
whole,
which
created
consisted
multiple
fiefdoms
rather
than
a coherent
whole,
which
created
confusion
and
a disconnect
between
thethe
bank
and
what
was
really
going
onon
confusion
and
a disconnect
between
bank
and
what
was
really
going
in the
market.
in the
market.
27

would
be be
self-correcting.
London
banker
said
thatthat
poor
performance
focuses
would
self-correcting.A A
London
banker
said
poor
performance
focuses
attention,
in in
pretty
short
order,
onon
perverse
incentives
andand
thethe
market
sorts
them
attention,
pretty
short
order,
perverse
incentives
market
sorts
them
out.
out.
Only
a small
number
of of
respondents
feltfelt
thisthis
Banana
Skin
was
overdone.
senior
Only
a small
number
respondents
Banana
Skin
was
overdone.A A
senior
Swiss
financial
executive
said
thisthis
was
anan
image
issue
rather
than
real,
andand
thethe
Swiss
financial
executive
said
was
image
issue
rather
than
real,
chief
executive
of of
a UK
bank
said
thatthat
a a
lotlot
of of
focus
onon
thisthis
area
means
there
is is
chief
executive
a UK
bank
said
focus
area
means
there
more
transparency/fairness.
more
transparency/fairness.
18.
18.Emerging
Emergingmarkets
markets(9)
(9)
AAsharp
sharpfall
fallinin
concern
concernabout
about
emerging
emergingmarkets
markets
Well,
areare
they
coupled
or or
not?
sharp
fallfall
in in
thisthis
Banana
Skin
suggests
a a
Well,
they
coupled
not? The
The
sharp
Banana
Skin
suggests
lowering
of of
concern
about
thethe
health
of of
emerging
markets
relative
to to
other
risks.
lowering
concern
about
health
emerging
markets
relative
other
risks.
The
chief
economist
of of
a leading
international
bank
said:
The
lowlow
riskrisk
associated
The
chief
economist
a leading
international
bank
said:
The
associated
with
emerging
markets
shows
how
much
thethe
world
hashas
changed.
though
with
emerging
markets
shows
how
much
world
changed.Even
Even
though
emerging
markets
areare
notnot
decoupled,
they
areare
better
able
to to
cope.
emerging
markets
decoupled,
they
better
able
cope.
ButButthere
therewas
wasscepticism
scepticismamong
amongrespondents
respondentsabout
aboutthetheability
abilityof ofemerging
emerging
economies
to to
ride
thethe
storm
unharmed.
economies
ride
storm
unharmed.
There
is a
riskrisk
of of
complacency
here,
according
to to
one.
markets
will
There
is a
complacency
here,
according
one.Emerging
Emerging
markets
will
be be
impacted
as as
a result
of of
wider
market
movements,
said
thethe
head
of of
riskrisk
at at
an an
impacted
a result
wider
market
movements,
said
head
international
fund
management
company.
went
further.
head
of of
international
fund
management
company. Some
Some
went
further. The
The
head
operational
riskrisk
at aatUK
financial
group
forecast
anan
emerging
markets
crash
within
operational
a UK
financial
group
forecast
emerging
markets
crash
within
a two
year
time
frame.
saw
China
taking
a tumble.
can't
keep
onon
a two
year
time
frame. Many
Many
saw
China
taking
a tumble.ItIt
can't
keep
growing
growingat at8 8perpercent
centa year
a yearforforever,
ever,according
accordingto toa apartner
partnerat ata leading
a leading
consultancy.
consultancy.
Reasons
forfor
scepticism
included
thethe
lack
of of
transparency
in in
local
markets
(what
is is
Reasons
scepticism
included
lack
transparency
local
markets
(what
really
going
onon
there?),
a collapse
in in
commodity
prices,
andand
a greater
exposure
than
really
going
there?),
a collapse
commodity
prices,
a greater
exposure
than
is generally
realised
to to
realreal
world
developments.
is generally
realised
world
developments.
Sheila
Page,
senior
research
associate
at at
thethe
UKs
Overseas
Development
Institute,
Sheila
Page,
senior
research
associate
UKs
Overseas
Development
Institute,
said
there
was
a a
lack
of of
good
riskrisk
information
in in
thethe
case
of of
lending
to to
developing
said
there
was
lack
good
information
case
lending
developing
countries,
countries,andandover-confidence
over-confidenceabout
aboutprospects
prospectsforforChina
Chinaandandforforcommodity
commodity
prices.
deputy
director
of of
a large
international
financial
institution
said
he he
prices. The
The
deputy
director
a large
international
financial
institution
said
hoped
hopedbanks
banksare
arenotnottaking
takingcomfort
comfortfrom
fromthethedecoupling
decouplingtheory,
theory,andandareare
watchful.
Patel,
an an
analyst
with
Royal
Bank
of of
Scotland
Group
in in
thethe
UK,
watchful.Jitan
Jitan
Patel,
analyst
with
Royal
Bank
Scotland
Group
UK,
said
thatthat
Asia
hadhad
become
anan
oasis
in in
thethe
midst
of of
slowing
growth
in in
thethe
western
said
Asia
become
oasis
midst
slowing
growth
western
markets.
The
fear
is that
these
twotwo
areare
more
interdependent
than
many
realise
andand
markets.
The
fear
is that
these
more
interdependent
than
many
realise
thethe
pool
of of
water
will
begin
to to
drydry
up.
pool
water
will
begin
up.
Some
respondents
feared
thatthat
banks
might
stillstill
be be
lured
to to
emerging
markets
byby
Some
respondents
feared
banks
might
lured
emerging
markets
their
relative
stability,
or or
byby
a continuing
desire
to to
diversify
risk.
partner
at at
a a
their
relative
stability,
a continuing
desire
diversify
risk.A A
partner
large
London
lawlaw
firm
said
thatthat
difficulties
in in
mature
markets
will
attract
banks
to to
large
London
firm
said
difficulties
mature
markets
will
attract
banks
higher
riskrisk
emerging
market
business.
higher
emerging
market
business.
Emerging markets themselves were generally more optimistic about the outlook,
feeling that they might be spared the worst of global shocks, though access to
funding was a big concern.
28

19. Back office (24)
The Cinderella
department
Concern about back office risk is rising because of the volatility of markets and the
Soc Gen rogue trader incident.
Huge trading volumes and the greater complexity of transactions were seen to be
straining settlement systems and creating lengthy backlogs.
Greatest concern
focused on the derivatives markets where, in the words of a senior US banker,
settlement capability is appalling.
Some respondents said these risks would increase because the back office did not
receive the same investment or talent as the front office. The chief executive of an
Internet-based trading facility said: The infrastructure of our industry (the
plumbing) seems impervious to the competitive forces for improvement that drive,
say, the retail and motor industries. Paper-based seems good enough, and lobbying
to protect legacy systems seems easy. Alan Peachey, author of a book on banking
disasters, described the back office as the Cinderella department which senior
management considered to be below their dignity.
But others felt that many of these weaknesses were being dealt with, and that Soc
Gen had given a spur to improvement. A German consultant said that the middle
and back office are getting focus and investment (incl. STP) in banks where there
has been nearly ten years of under-investment. A London banker said that
volumes are reducing and backlog levels are being overcome.
20. Retail sales practices (22)

A clear division of view on this one between bankers (its getting better) and nonbankers (no it isnt!).
MiFID is sorting
out the mis-selling
problem
Despite the hoohah that always

accompanies this Banana Skin, it has to
be said that it has never featured high
The dream machine 1
on the list and, this year at any rate, is
not seen as a strong riser.
The
At the end of the day, the financial
comments from banking respondents
services industry has been in the
"dreams" business, i.e. financing
included: Standards are tightening at
dreams of residences, vacation
last (Swiss bank),
post-Spitzer,
homes, secure retirement. But
mutual funds cleaned up their acts
watch-out when broken dreams
(New York bank), and a respondent
happen in social democracies.
from a large German bank who said
there was more scouting and the risk
Former US regulator
was therefore falling.
A European
regulator said that these issues were
now covered by MiFID and getting
closer regulatory attention. The chief executive of a UK bank said that regulation
and systems have gone a long way to reduce this risk.
But outsiders pointed out that the sub-prime crisis was caused largely by
questionable selling practices, and that the prospect was for more rather than less of
that sort of activity.
The retailisation of complex products is only just
beginning, said a partner at one of the large UK law firms.
The head of risk
policy at a Swiss bank said that the retailing of complex structures by sellers who
29

do not understand and communicate the real risk of products could have a deep
reputational impact on the bank. Another said it will catch up with them sooner
or later as more regulation or reputation damage.
21. Conflicts of interest (16)

Conflicts of interest between banks and their customers always increase when times
are tough, as now. When profits and people are under pressure, conflicts of
interest get sharper and more difficult to manage, said a London banker. The head
of risk at a UK financial group said: Risks increase with complex structures where
products are showing losses.
These conflicts were seen to be sharpest in investment banks because of the
multiplicity of their client relationships. A financial analyst thought that more
skeletons would emerge from such institutions. But some respondents also saw
conflicts among retail banks, between their duty to their customers and their quest
for profit. Some attributed the Northern Rock fiasco to conflicting governance
loyalties.
22. Political shocks (15)

The threat of political shocks is seen to have receded since the last survey, mainly
because wars in Iraq and Afghanistan have been pushed out of the headlines by
more urgent crises closer to home. But many issues remain.
Jens Tholstrup, executive director of political analysts Oxford Analytica, said that
this remains a high (but unpredictable) risk area. Economic nationalism, food and
energy scarcities may cause particular problems. The head of risk at a UK
financial group said that the financial system and market sentiment are both fragile;
political shocks can have a big impact. Another thought that the emergence of
large new players like India, China and Russia raised the likelihood of clashes.
While many respondents cited the risk of unrest in places like the Middle East,
Turkey and Pakistan, most comment focused on the political outlook in the US
which had become a bit of a wild card in the words of a UK banker. Prof. Ryo
Watabe of Hosei University in Japan saw a weak US government posing a threat.
One respondent pointed out that in a years time, many of the major countries of the
West would be under new leadership, which created a wider prospect of uncertainty.
Russian bankers felt vulnerable to political risk, from internal shocks and from the
possible deterioration of Russias relations with the West. A banking risk economist
said that all this could lead to an outflow of capital from Russia, to a crisis of bank
liquidity, and to depreciation of bank capital.
Generally respondents felt that the uncertain political and economic climate could
lead to greater protectionism and tougher regulatory controls.
In the UK,
respondents saw the governments clumsy handling of sensitive tax issues
amounting to a political threat. Roger Gifford, UK country manager of Swedens
SEB, feared that proposals for tougher taxation of non-domiciled resident foreigners
would lead to a loss of foreign staff. Another respondent saw the finance sector
being hit by many poorly thought through 'sound bite' initiatives.
30
Rating the
the raters
raters
Rating
Rating agencies
agencies are
are seen
seen to
to be
be part
part of
of the
the problem,
problem, or
or at
at least
least over-reliance
over-reliance by
by
Rating
others on
on their
their ratings
ratings is.
is.
others
Rating agencies
agencies
Rating
are seen
seen to
to be
be part
part
are
of the
the problem
problem
of
Respondents saw
saw failings
failings both
both in
in the
the quality
quality of
of agencies
agencies ratings
ratings and
and in
in the
the comfort
comfort
Respondents
that others
others took
took from
from them.
them.
This was
was particularly
particularly the
the case
case with
with structured
structured
that
This
securities where
where poor
poor ratings
ratings had
had ramifications
ramifications throughout
throughout the
the credit
credit markets.
markets.
securities
Rating agencies
agencies have
have limited
limited insights
insights and
and don't
don't provide
provide aa particularly
particularly dynamic
dynamic
Rating
view, said
said one.
one. There
There was
was inadequate
inadequate risk
risk assessment
assessment [by
[by market
market users]
users] due
due to
to
view,
over-reliance on
on rating
rating agencies
agencies said
said another.
another. The
The problem
problem of
of rating
rating agencies
agencies
over-reliance
loyalties was
was also
also raised:
raised: to
to the
the market
market or
or to
to the
the client?
client? AA consultant
consultant said:
said: Not
Not
loyalties
only must
must the
the agencies
agencies be
be reformed
reformed to
to reduce
reduce conflicts,
conflicts, but
but banks
banks must
must reform
reform their
their
only
credit assessment
assessment processes.
processes.
credit
One respondent
respondent said
said II cannot
cannot see
see the
the current
current rating
rating agency
agency model
model continuing
continuing into
into
One
the future.
future.
the
23. Business continuation (21)

This risk
risk has
has been
been slipping
slipping steadily
steadily down
down the
the charts
charts since
since 9/11
9/11 when
when itit was
was ranked
ranked
This
No 5.
5. So
So much
much work
work has
has been
been done
done to
to prevent
prevent business
business disruption
disruption that
that the
the
No
perception,
at
any
rate,
of
the
threat
has
eased,
though
terrorist
attack
featured
in
perception, at any rate, of the threat has eased, though terrorist attack featured in
many
responses.
many responses.
However the
the term
term has
has acquired
acquired aa wider
wider meaning
meaning in
in aa time
time of
of financial
financial turmoil.
turmoil. A
A
However
UK
respondent
said:
The
risks
are
moving
from
disruption
through
external
agency
UK respondent said: The risks are moving from disruption through external agency
(terrorism, bird
bird flu)
flu) to
to failure
failure of
of market
market systems
systems or
or major
major counterparties.
counterparties.
A
(terrorism,
A
consultant
said
that
the
risk
was
now
from
the
effects
of
financial
crisis
rather
than
consultant said that the risk was now from the effects of financial crisis rather than
physical disruption.
disruption. Another
Another said
said that
that many
many cheap
cheap money
money business
business models
models will
will
physical
fail in
in an
an era
era of
of dear
dear money.
money.
fail
24. Money laundering (18)

A got-up
got-up risk?
risk?
A
This Banana
Banana Skin
Skin has
has fallen
fallen steeply,
steeply, mainly
mainly because
because many
many bankers
bankers view
view this
this risk
risk as
as
This
got
up
by
regulators
and
politicians
to
demonstrate
their
toughness
on
terrorism
got up by regulators and politicians to demonstrate their toughness on terrorism
and crime,
crime, rather
rather than
than as
as aa genuine
genuine problem.
problem. A
A member
member of
of the
the executive
executive committee
committee
and
of aa large
large Swiss
Swiss financial
financial group
group said
said this
this was
was high
high profile
profile but
but only
only material
material as
as
of
respects regulation.
regulation. Although
Although bank
bank reputations
reputations are
are at
at stake,
stake, the
the amounts
amounts involved
involved
respects
are small
small relative
relative to
to total
total transactions
transactions passing
passing through
through the
the system.
system. A
A UK
UK bank
bank
are
director
said
the
problem
always
was
overhyped.
director said the problem always was overhyped.
Many respondents
respondents saw
saw this
this risk
risk as
as part
part of
of the
the wider
wider problem
problem of
of over-regulation.
over-regulation. A
A
Many
UK bank
bank director
director said:
said: My
My main
main concern
concern is
is the
the apparent
apparent inability
inability of
of the
the Bank
Bank of
of
UK
England and
and the
the FSA
FSA to
to understand
understand and
and manage
manage the
the systemic
systemic risks,
risks, principally
principally of
of
England
liquidity,
while
they
give
undue
attention
to
Treating
Customers
Fairly
and
Money
liquidity, while they give undue attention to Treating Customers Fairly and Money
Laundering Procedures.
Procedures. The
The senior
senior vice-president
vice-president of
of aa large
large Canadian
Canadian bank
bank said
said
Laundering
that AML
AML regulation
regulation was
was imposing
imposing significant
significant costs
costs and
and continued
continued pressure
pressure to
to
that
31
Profitability: where next?

Banks profits are heading down, but how severe will this be?
A bank chairman said that the financial system will have to adapt to lower
profitability since some of the more profitable income streams will no longer exist.
It will also have to adapt to generally lower RoEs because of [regulatory
requirements for] more capital.
A senior regulator saw banks facing a
challenge to profitability through pressures from slowing growth rates in the real
economy.
Michael Foot, chairman of Promontory Financial (UK), said that frantic short term
US interest rate cuts and fiscal stimuli from governments that cant afford them
would offset some of the pressures on banks. But not enough. Underlying bank
profitability will fall in most areas, a few weak banks will fail, more will get
ushered into arranged mergers.
Respondents said it was difficult to see where the next big source of profits would
come from, and some feared that banks would be driven back into risky markets
in search of yield.
meet short term deadlines, and the chairman of a large US bank thought the
problem will not go away as long as regulators worry.
But some respondents thought there was a real issue here. A Canadian banker said
the risk is still high and the consequence of an incident severe.
25. Environmental risk (25)

This is as high as environmental risk has come in more than ten years of Banana
Skin surveys, i.e. not very, and the tone of the comment has not changed much:
potentially very important, but distant and hard to quantify. It was, however, seen
as rising strongly, particularly in North America and the Asia Pacific.
Climate change was much cited as a risk, financially if losses materialise and
reputationally if banks fail to be seen to be doing something about it. The head of
corporate citizenship at a large Canadian bank said there were now expectations
that banks should control the activities of their clients and client industries.
Peter Hughes, director of corporate citizenship at The Smart Company, said that
banks must be seen to be concerned in today's world, focused on climate change
challenges.
However some respondents were dismissive. Its getting enough attention said
one, An easy stick with which to beat the banks said another. A number made the
point that if climate change responsibility lay with banks, it was more a matter for
those in India and China.
32

26.
26. Banking
Bankingmarket
marketovercapacity
overcapacity(17)
(17)
But
Butwill
willbanking
banking
capacity
capacitybebe
allowed
allowedtotoshrink?
shrink?
TheThecrisis
crisiswillwillsqueeze
squeezea lot
a lotof ofcapacity
capacityoutoutof ofthethemarket
marketthrough
throughfunding
funding
difficulties,
difficulties,
pressure
pressure
on on
capital
capital
andand
profits,
profits,
banks
banks
exiting
exiting
unprofitable
unprofitable
lines,
lines,
poor
poor
prospects
prospects
forfor
market
market
growth
growth
- which
- which
is why
is why
thethe
Banana
Banana
Skin
Skin
hashas
fallen.
fallen. What
What
overcapacity?
overcapacity?
asked
asked
a UK
a UK
bank
bank
director.
director. ButBut
a number
a number
of of
respondents
respondents
saw
saw
reasons
reasons
why
why
overcapacity
overcapacity
might
might
persist,
persist,
even
even
grow.
grow.
NoNo
time
time
forfor
nemesis
nemesis
Hubris.
Hubris.If Ifthey
theymanage
manageto togetget
themselves
themselvesoutoutof ofthethepresent
present
mess,
mess,
they
they
willwill
patpat
themselves
themselves
on on
thethe
back
back
andand
rush
rush
intointo
thethe
next
next
one.
one.
David
David
Shirreff
Shirreff
Business
Business
& Finance
& Finance
correspondent
correspondent
TheThe
Economist
Economist
Frankfurt
Frankfurt
Despite
Despite
capital
capital
constraints,
constraints,
thethe
banking
banking
industry
industryis isunlikely
unlikelyto toshrink
shrinkmuch
much
because
because
of of
thethe
public
public
interest
interest
in in
keeping
keeping
banks
banks going,
going, through
through guarantees,
guarantees,
subsidy
subsidyandandeven
evennationalisation,
nationalisation,vizviz
Northern
Northern
Rock.
Rock.A A
bank
bank
economist
economist
said
said
thatthat
sovereign
sovereign
wealth
wealth
fund
fund
support
support
has
has
prevented
prevented
a consolidation
a consolidation
of of
thethe
banking
banking
sector
sector
in the
in the
West
West
andand
a US
a US
banker
banker
said
said
thatthat
technology
technology
keeps
keeps
making
making
it easier
it easier
andand
easier
easier
to enter
to enter
thethe
market.
market.
Europeans
Europeans
sawsaw
banks
banks
fighting
fighting
to hold
to hold
on on
to totheir
theirmarket
marketshares,
shares,engaging
engagingin in
aggressive
aggressive
marketing
marketing
andand
pricing,
pricing,
even
even
moving
moving
in in
to to
neighbouring
neighbouring
countries
countries
to to
find
find
new
new
customers.
customers.A German
A German
banker
banker
sawsaw
hishis
notoriously
notoriously
fragmented
fragmented
banking
banking
industry
industry
failing
failing
to to
consolidate,
consolidate,
resulting
resulting
in in
surplus
surplus
capacity.
capacity. In In
East
East
Europe,
Europe,
banks
banks
expected
expected
to to
seesee
an an
influx
influx
of of
foreign
foreign
institutions
institutions
eager
eager
to to
take
take
advantage
advantage
of of
their
their
relatively
relatively
undeveloped
undeveloped
markets.
markets.
27.
27. Payment
Paymentsystems
systems(29)
(29)
Concerns
Concerns
about
about
financial
financial
plumbing
plumbing
have
have
usually
usually
been
been
lowlow
order
order
in in
Banana
Banana
Skins
Skins
surveys,
surveys,
andand
thatthat
remains
remains
thethe
case
case
in in
thethe
absence
absence
of of
major
major
disasters,
disasters,
even
even
in in
a time
a time
of of
crisis.
crisis.
ButBut
thethe
fearfear
of of
breakdown
breakdown
never
never
goes
goes
away.
away. A A
UKUK
respondent
respondent
said
said
thisthis
waswas
potentially
potentially
a big
a big
source
source
of of
risk,
risk,
particularly
particularly
when
when
liquidity
liquidity
is tight.
is tight.
Uncomfortably
Uncomfortably
binary
binary
in outcome.
in outcome.Others
Others
highlighted
highlighted
thethe
additional
additional
stresses
stresses
created
created
by by
derivative
derivative
markets
markets
andand
hedge
hedge
funds
funds
with
with
their
their
high
high
andand
volatile
volatile
trading
trading
volumes.
volumes.
Global
Globalpayment
payment
systems
systemsare
are
coming
comingtogether:
together:
isisthat
thatgood
goodoror
bad?
bad?
Many
Many
respondents
respondents
focused
focused
on on
thethe
coming
coming
together,
together,
globally,
globally,
of of
payment
payment
systems,
systems,
andand
next
next
years
years
launch
launch
of of
thethe
Single
Single
Euro
Euro
Payments
Payments
Area
Area
in in
thethe
EU.
EU.Would
Would
these
these
narrow
narrow
thethe
risks
risks
or or
merely
merely
enlarge
enlarge
thethe
scope
scope
forfor
disaster?
disaster?
TheThe
compliance
compliance
officer
officer
of of
a major
a major
French
French
bank
bank
said:
said:
AsAs
thethe
European
European
market
market
undergoes
undergoeschanges
changesandandworld
worldpayment
paymentvolumes
volumesrapidly
rapidlyincrease,
increase,thetheriskriskof of
operational
operational
failures
failures
or or
inefficiencies
inefficiencies
is likely
is likely
to rise,
to rise,
particularly
particularly
as as
new
new
cross-border
cross-border
commercial
commercial
arrangements
arrangements
andand
new
new
providers
providers
go go
through
through
a learning
a learning
phase.
phase.
TheThe
chief
chief
executive
executive
of of
a large
a large
EUEU
payments
payments
system
system
said
said
thatthat
efficient
efficient
systems
systems
willwill
transmit
transmit
badbad
news
news
faster
faster
andand
a respondent
a respondent
from
from
a major
a major
USUS
bank
bank
sawsaw
possible
possible
difficulties
difficulties
in in
greater
greater
interdependence
interdependence
between
between
securities
securities
andand
payment
payment
settlement
settlement
systems
systems
around
around
thethe
world.
world.
33

28.
28. Merger
Mergermania
mania(19)
(19)
Mergers
Mergersofofthe
the
damned
damned
Respondents
Respondents
expect
expect
banks
banks
to shy
to shy
away
away
from
from
mergers
mergers
during
during
thethe
current
current
turmoil
turmoil
- too
- too
risky
risky
- reducing
- reducing
thethe
rank
rank
of of
thisthis
Banana
Banana
Skin
Skin
by by
a long
a long
way.
way.One
One
respondent
respondent
said
said
thatthat
mergers
mergers
would
would
be be
defensive
defensive
now,
now,
rather
rather
than
than
aggressive,
aggressive,
which
which
is is
probably
probably
better.
better.
Merger
Merger
in in
present
present
conditions
conditions
would
would
also
also
be be
a sign
a sign
of of
weakness,
weakness,
mergers
mergers
of of
thethe
damned,
damned,
as as
oneone
respondent
respondent
putput
it. it.Several
Several
respondents
respondents
from
from
Germany
Germany
expected
expected
to to
seesee
mergers
mergers
there
there
as as
thethe
fragmented
fragmented
banking
banking
system
system
andand
thethe
Landesbanken
Landesbanken
sought
sought
consolidation.
consolidation.
ButBut
some
some
looked
looked
further
further
ahead
ahead
to to
a time
a time
when
when
stronger
stronger
banks
banks
might
might
trytry
to to
take
take
advantage
advantage
of of
thethe
weaker.
weaker.A US
A US
bank
bank
chairman
chairman
saw
saw
thethe
current
current
turmoil
turmoil
leading
leading
to to
merger
merger
andand
concentration
concentration
with
with
associated
associated
risks
risks
of of
complexity
complexity
andand
poor
poor
execution.
execution.
AA
respondent
respondent
from
from
Switzerland
Switzerland
also
also
expected
expected
to to
seesee
an an
acceleration
acceleration
in in
mergers
mergers
because
because
growth
growth
is hard
is hard
to find
to find
andand
prices
prices
areare
low.
low.
Thank
Thank
heaven
heavenforforSWFs
SWFs
What
What
would
would
happen
happen
if securities
if securities
pledged
pledged
as as
collateral
collateral
forfor
emergency
emergency
loans
loans
from
from
central
central
banks
banks
were
were
to to
default,
default,
or or
be be
downgraded,
downgraded,
resulting
resulting
in in
thethe
collateral
collateral
no no
longer
longer
being
being
eligible?
eligible?Would
Would
central
central
banks
banks
be be
allowed
allowed
to continue
to continue
lending?
lending?
CanCan
thethe
Bank
Bank
of of
England
England
bailbail
outout
a further
a further
Northern
Northern
Rock
Rock
(or(or
several
several
of of
them)?
them)?
Effectively,
Effectively,
thethe
lenders
lenders
of of
lastlast
resort
resort
today
today
areare
ADIA,
ADIA,
GICGIC
andand
thethe
other
other
funds
funds
of of
wealthy
wealthy
countries.
countries.
ForFor
thethe
time
time
being,
being,
they
they
areare
providing,
providing,
butbut
what
what
would
would
happen
happen
if they
if they
stopped?
stopped?
Rick
Rick
Sopher
Sopher
Managing
Managing
Director
Director
LCFLCF
Edmond
Edmond
de de
Rothschild
Rothschild
Asset
Asset
Management
Management
UKUK
29.
29.Too
Toolittle
littleregulation
regulation(30)
(30)
This
This
remains
remains
a low
a low
order
order
Banana
Banana
Skin,
Skin,
though
though
it has
it has
crept
crept
up up
oneone
place
place
since
since
thethe
lastlast
survey.
survey.
One
One
reason
reason
is is
thatthat
thethe
banking
banking
crisis
crisis
hashas
exposed
exposed
thethe
need
need
forfor
more
more
or
or
at at
least
least
better
better
regulation
regulation
in in
a number
a number
of of
areas.
areas.A A
respondent
respondent
in in
London
London
said
said
it had
it had
focused
focusedthethebanking
bankingauthorities
authoritieson onhow
howlittle
littleof ofthethecredit
creditmarkets
marketsthey
theyareare
currently
currently
able
able
to to
influence,
influence,
which
which
some
some
would
would
saysay
is is
a key
a key
source
source
of of
today's
today's
problems.
problems. A A
management
management
consultant
consultant
thought
thought
there
there
was
was
too
too
little
little
of of
thethe
right
right
kind
kind
of of
regulation.
regulation.Banks
Banks
cope
cope
well
well
with
with
thethe
steady
steady
state,
state,
butbut
regulators
regulators
need
need
to to
help
help
them
them
prepare
prepare
forfor
when
when
things
things
change
change
rapidly,
rapidly,
as as
they
they
may
may
well
well
do do
soon.
soon.ButBut
thethe
head
head
of of
financial
financial
services
services
at at
a leading
a leading
public
public
relations
relations
consultancy
consultancy
saw
saw
thethe
opposite
opposite
problem:
problem:
banking
banking
innovation
innovation
was
was
outpacing
outpacing
supervisors/regulators'
supervisors/regulators'
ability
ability
to understand
to understand
what
what
is taking
is taking
place
place
andand
where
where
thethe
risks
risks
lie.
lie.
34

The
The
most
most
pressing
pressing
area
area
forfor
regulatory
regulatory
attention
attention
is is
liquidity
liquidity
which
which
hashas
been
been
largely
largely
The
most
pressing
area
for
regulatory
attention
is
liquidity
which
has
been
largely
overlooked
overlooked
capital
adequacy
rules.
Antony
Thomlinson,
partner
overlookedbyby
bythethe
thecapital
capitaladequacy
adequacyrules.
rules. Antony
AntonyThomlinson,
Thomlinson,a aapartner
partnerat at
at
Eversheds,
Eversheds,
said
said
it it
was
clear
clear
that
that
thethe
prudential
prudential
requirements
requirements
applying
applying
to to
financial
financial
Eversheds,
said
it was
was
clear
that
the
prudential
requirements
applying
to
financial
institutions
institutions
areare
deeply
deeply
flawed.
They
They
concentrate
onon
capital
capital
exclusion
exclusion
of of
institutions
are
deeplyflawed.
flawed.
Theyconcentrate
concentrate
on
capitalto to
tothethe
the
exclusion
of
liquidity,
liquidity,
and,
and,
at
at
least
least
in
in
their
their
old
old
form,
form,
actively
actively
encouraged
encouraged
risky
risky
lending.
lending.
liquidity, and, at least in their old form, actively encouraged risky lending.
Plenty
Plenty
blind
Plentyofof
ofblind
blind
spots
spots
on
the
spotson
onthe
the
regulatory
regulatory
map
regulatorymap
map
Other
Other
regulatory
blind
spots
included
hedge
funds,
structured
products,
risk
Otherregulatory
regulatoryblind
blindspots
spotsincluded
includedhedge
hedgefunds,
funds,structured
structuredproducts,
products,risk
risk
management,
management,
incentive
schemes,
cross-border
activities,
rating
agencies,
even
management,incentive
incentiveschemes,
schemes,cross-border
cross-borderactivities,
activities,rating
ratingagencies,
agencies,even
even
sovereign
sovereign
wealth
wealth
funds,
funds,
notnot
a bad
aa bad
listlist
forfor
anan
area
area
that
that
most
most
bankers
bankers
already
already
consider
consider
sovereign
wealth
funds,
not
bad
list
for
an
area
that
most
bankers
already
consider
to to
bebe
over-regulated.
over-regulated.
But
as as
many
many
pointed
pointed
out,
out,
it it
was
notnot
a question
aa question
of of
blanketing
blanketing
to
be
over-regulated.But
But
as
many
pointed
out,
it was
was
not
question
of
blanketing
thethe
world
world
with
with
regulation,
regulation,
butbut
directing
directing
it at
itit at
the
right
right
targets.
targets.
the
world
with
regulation,
but
directing
at the
the
right
targets.
Several
Several
respondents
respondents
also
also
said
said
that
that
regulation
regulation
outside
outside
thethe
main
main
industrial
industrial
countries
countries
Several
respondents
also
said
that
regulation
outside
the
main
industrial
countries
was
was
still
poor
even
though
many
emerging
economies
had
become
very
large
wasstill
stillpoor
pooreven
eventhough
thoughmany
manyemerging
emergingeconomies
economieshad
hadbecome
becomevery
verylarge
large
indeed.
indeed.
Respondents
from
from
emerging
emerging
economies
economies
tended
tended
to to
share
share
this
this
view,
view,
saying
saying
indeed.Respondents
Respondents
from
emerging
economies
tended
to
share
this
view,
saying
that
that
local
local
regulators
regulators
were
were
unsophisticated
unsophisticated
and
and
bureaucratic.
bureaucratic.
Russian
bankers
bankers
saw
saw
that
local
regulators
were
unsophisticated
and
bureaucratic.Russian
Russian
bankers
saw
themselves
themselves
being
hampered
heavythemselvesbeing
beinghampered
hamperedbyby
byheavyheavyhanded
handed
regulation
and
growing
handed regulation
regulation and
and a aa growing
growing
emphasis
onon
consumer
consumer
rights.
rights.
AA
The
The
dream
machine
emphasis
on
consumer
rights.
A
Thedream
dreammachine
machine2 22 emphasis
respondent
respondent
Indonesia
said
that
respondentin in
inIndonesia
Indonesiasaid
saidthat
thatthethe
the
AsAs
long
long
asas
thethe
industry
industry
keeps
keeps
onon
authorities
authorities
efforts
create
stable
As
long
as
the
industry
keeps
on
authoritiesefforts
effortsto to
tocreate
createa aastable
stable
investing
investing
in in
things
things
that
that
sound
sound
tootoo
investing
in
things
that
sound
too
financial
financial
system
system
have
have
yetyet
to to
bear
bear
fruit,
fruit,
financial
system
have
yet
to
bear
fruit,
good
good
true,
there
goodto to
tobebe
betrue,
true,there
therewillwill
willbebe
be
and
and
regulations
were
ineffective,
and regulations
regulations were
were ineffective,
ineffective,
instances
instances
of of
loss-making
activity.
activity.
instances
of loss-making
loss-making
activity.
inhibiting
inhibiting
and
and
inappropriate.
inappropriate.
inhibiting
and
inappropriate.
Head
Head
of of
product
development
development
Head
of product
product
development
London-based
London-based
international
international
bank
bank
London-based
international
bank
Even
Even
so,so,
many
many
respondents
respondents
feared
feared
that
that
Even
so,
many
respondents
feared
that
thethe
crisis
would
give
regulators
their
thecrisis
crisiswould
wouldgive
giveregulators
regulatorstheir
their
head.
head.
From
thethe
UK
UK
one
one
asked:
asked:
Will
Will
head. From
From
the
UK
one
asked:
Will
regulators
regulators
focus
key
issues
easy,
bureaucratic
wins?
wins?
and
and
a aUS
regulatorsfocus
focusonon
onthethe
thekey
keyissues
issuesor or
orthethe
theeasy,
easy,bureaucratic
bureaucratic
wins?
and
a US
US
respondent
respondent
said
said
that
that
thethe
fear
fear
of of
tootoo
little
little
regulation
regulation
existed
existed
only
only
in in
thethe
minds
minds
of of
thethe
respondent
said
that
the
fear
of
too
little
regulation
existed
only
in
the
minds
of
the
regulators.
regulators.
regulators.
30.
30. Competition
Competitionfrom
fromnew
newentrants
entrants (28)
(28)
Who
Who
will
take
Whowill
willtake
take
advantage
advantage
advantageofof
of
weakened
weakened
banks?
weakenedbanks?
banks?
With
With
thethe
banking
banking
industry
industry
in in
a febrile
aa febrile
state,
state,
this
this
may
may
notnot
bebe
thethe
moment
moment
forfor
new
new
With
the
banking
industry
in
febrile
state,
this
may
not
be
the
moment
for
new
competitors
competitors
to to
make
make
their
their
move.
move.
OrOr
is is
it?
competitors
to
make
their
move.
Or
is it?
it?
The
The
head
head
of of
finance
finance
at at
a large
aa large
UK
UK
bank
bank
said
said
that
that
current
current
conditions
conditions
were
were
aa
barrier
barrier
The
head
of
finance
at
large
UK
bank
said
that
current
conditions
were
a
barrier
to to
entry
entry
a view
aa view
which
which
was
was
widely
widely
echoed.
echoed.
But
others
others
took
took
a different
aa different
view.
view.
to
entry
view
which
was
widely
echoed. But
But
others
took
different
view.
The
The
capital
capital
constraints
constraints
faced
faced
byby
major
major
banks
banks
could
could
create
create
entry
entry
opportunities
opportunities
forfor
The
capital
constraints
faced
by
major
banks
could
create
entry
opportunities
for
well-funded
well-funded
outsiders
outsiders
like
like
sovereign
sovereign
wealth
wealth
funds,
funds,
even
even
hedge
hedge
funds.
funds.
The
chief
chief
well-funded
outsiders
like
sovereign
wealth
funds,
even
hedge
funds. The
The
chief
economist
economist
of of
a major
aa major
international
international
bank
bank
said
said
that
that
regional
regional
banks
banks
from
from
thethe
emerging
emerging
economist
of
major
international
bank
said
that
regional
banks
from
the
emerging
world
world
will
become
stronger
and
bigger.
AA
official
predicted
that
worldwill
willbecome
becomestronger
strongerand
andbigger.
bigger.
AUSUS
USofficial
officialpredicted
predictedthat
that
unregulated
unregulated
entities
entities
will
will
reap
reap
thethe
benefits
benefits
of of
today's
today's
market
market
uncertainty
uncertainty
and
and
thethe
unregulated
entities
will
reap
the
benefits
of
today's
market
uncertainty
and
the
likely
likely
increase
increase
in in
financial
financial
regulation.
regulation.
likely
increase
in
financial
regulation.
This
This
prospect
prospect
posed
posed
threats.
threats.
Japanese
Japanese
banker
banker
thought
thought
that
that
new
new
entrants
entrants
would
would
This
prospect
posed
threats.A A
A
Japanese
banker
thought
that
new
entrants
would
decrease
decrease
thethe
banks
banks
role
role
and
and
bring
bring
disintermediation,
disintermediation,
and
and
thethe
chief
chief
executive
executive
of of
a aa
decrease
the
banks
role
and
bring
disintermediation,
and
the
chief
executive
of
UK
UK
bank
bank
said
said
that
that
newcomers
newcomers
strategies
strategies
would
would
bebe
based
based
onon
share
share
or or
price,
price,
rather
rather
UK
bank
said
that
newcomers
strategies
would
be
based
on
share
or
price,
rather
than
than
longer-term
relationship
strategy.
East
European
respondents
were
thana aalonger-term
longer-termrelationship
relationshipstrategy.
strategy.East
EastEuropean
Europeanrespondents
respondentswere
were
concerned
concerned
about
about
thethe
encroachment
encroachment
of of
foreign
foreign
institutions
institutions
and,
and,
in in
Russia,
Russia,
byby
thethe
concerned
about
the
encroachment
of
foreign
institutions
and,
in
Russia,
by
the
predations
predations
of of
state-owned
state-owned
banks.
banks.
predations
of
state-owned
banks.
35

But some respondents welcomed the prospect of more competition. One said that
the lack of genuine competition is one of the roots of current financial instability,
and another wished there were more new entrants, especially in monoline
insurance.
The big question

Does the credit crunch pose a threat to the system, or is it only a problem for
particular markets and institutions? Respondents were divided.
Those who thought it was systemic saw events spiralling downwards: losses
causing bank failures leading to more losses and failures. The risk director of a
London merchant bank said: As I write, the safety of many financial institutions is
in doubt and the contagion is spreading from banks and insurance companies to
specialist funds and other parts of the financial sector. My main concerns
therefore relate to the risks of recession which will further undermine confidence
in the financial sector and increase the risk of systemic failure. Richard
McManus, a partner at PA Consulting Group, said that we are in a situation
where enthusiasm for off-balance sheet vehicles has resulted in an
underestimate of risk and unpriced risk. In consequence the spectre of systemic
risk is real.
But many respondents were more sanguine, believing that the system had
greater resilience than the doom mongers gave it credit for and that if a crash
did come it would be because of over-reaction rather than fundamental
weakness.
A capital markets consultant said his main concern was overreaction of policy
makers. Yes, there will be some FS institutions who get into trouble, but it is not a
systemic problem which requires populist solutions. The chief financial officer
of a Hungarian bank said that declining profitability will lead to further casualties
but does not threaten the stability of the financial intermediation system, and
Beat Hodel, chief risk officer at the Raiffeisen Group in Switzerland, thought that
overall, the stability of the financial sector is higher than the actual turmoil
suggests.
36

Preparedness
Preparedness
We
Weasked
askedrespondents:
respondents:How
Howwell
wellprepared
prepareddodoyou
youthink
thinkyour
yourown
ownand
andother
other
institutions
institutions
are
are
toto
handle
handle
the
the
risks
risks
you
you
have
have
identified?
identified?
Poorly
Poorly
4%
4%
Well
Well
24%
24%
AAcautious
cautious
response
responseon
onbank
bank
preparedness
preparedness
Just
Justunder
undera aquarter
quarterofofthem
themthought
thought
banks
bankswere
werewell
wellprepared
preparedforfordifficult
difficult
times,
times,
and
and
only
only
four
four
per
per
cent
cent
thought
thought
they
they
werent.
werent.The
Therest
restgave
gavea mixed
a mixedresponse,
response,
usually
usually differentiating
differentiating between
between us
us
(good)
(good)and
andthem
them(poor),
(poor),ororbetween
between
different
different
operating
operatingenvironments.
environments. This
This
was
was a a significantly
significantly more
more cautious
cautious
response
responsethan
thanthethelast
lastsurvey
surveywhere
where
Well
Wellscored
scored64%,
64%,Mixed
Mixed22%
22%and
and
Poorly
Poorly
14%.
14%.
A Abreakdown
breakdownofofthetheresponses
responsesbybytype
type
shows
showsbankers
bankersgiving
givingthethemost
mostoptimistic
optimistic
response,
response,observers
observersthethemost
mostcautious,
cautious,
and
and
regulators
regulators
inin
between,
between,
though
though
none
none
ofof
them
them
casting
casting
a Poorly
a Poorly
vote.
vote.
Mixed
Mixed
72%
72%
%%
Well
Well
Total
Total
Bankers
Bankers Observers
ObserversRegulators
Regulators
2424
2828
1616
1919
Mixed
Mixed
7272
6868
7777
8181
Poorly
Poorly
44
44
77
00
37

Glossary
ADIA: Abu Dhabi Investment Authority, a sovereign wealth fund.
AML: Anti-money laundering
CDO: Collateralised debt obligation
Structured
CDS: Collateralised debt security
products
CLO: Collateralised loan obligation
CMBS: Collateralised mortgage-backed security
Conduit: An off-balance sheet business vehicle
GIC: Government Investment Corporation, a Singapore wealth fund
MiFID: EU Markets in Financial Instruments Directive
ORM: Operational Risk Management
OTC: Over the Counter
SIV: Structured Investment Vehicle, an off-balance sheet business vehicle
STP: Straight Through Processing
38
CSFI
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 2008

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. Wed be very grateful if you would take a few minutes to fill out
this form, and return it to us by February 29th.
CSFI, 5 Derby Street, London W1J 7AB, UK
Fax: +44 (0) 20 7493 0190
Email: info@csfi.org.uk
Name
Position
Institution
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 two to three years.
Please turn over
39

Question 2. Here are some areas of risk which have been attracting attention. How do you rate their
severity, and what is their trend: rising, steady or falling? Use the right hand column to add comments.
Insert more risks at the bottom if you wish.
Severity
Trend
1=low
5=high
Rising
Steady
Falling
Comment
1 Back office
2 Banking market over-capacity
Big market movements:
3 - commodities
4 - credit spreads
5 - currencies
6 - equities
7 - interest rates
8 Business continuation
9 Competition from new entrants
10 Conflicts of interest
11 Corporate governance
12 Credit risk
13 Derivatives
14 Emerging markets
15 Environmental risk
16 Fraud
17 Hedge funds
18 High dependence on technology
19 Liquidity
20 Macro-economic trends
21 Management incentives
22 Merger mania
23 Money laundering
24 Payment systems
25 Political shocks
Regulation:
26 - too much
27 - too little
28 Retail sales practices
29 Risk management techniques
30 Rogue trader
31
Question 3. How well prepared do you think your own and other institutions are to handle
the risks you have identified?
Poorly
40
Mixed
Well
CSFI PUBLICATIONS
1.

Financing the Russian safety net: A proposal for Western funding of social security in Russia, coupled with
guarantee fund for Western investors.
By Peter Ackerman/Edward Balls. September 1993
40/$65
2.

Derivatives for the retail client: A proposal to permit retail investors access to the risk management aspects of
financial derivatives, currently available only at the wholesale level.
By Andrew Dobson. Nov 1993 (Only photostat available)
10/$15
3.

Rating environmental risk: A proposal for a new rating scheme that would assess a companys environmental
exposure against its financial ability to manage that exposure.
By David Lascelles. December 1993
25/$40
4.

Electronic share dealing for the private investor: An examination of new ways to broaden retail share ownership,
inter alia, by utilising ATM networks, PCs, etc.
By Paul Laird. January 1994
25/$40
5.

The IBM dollar: A proposal for the wider use of target currencies, i.e. forms of public or private money that can be
used only for specific purposes.
By Edward de Bono. March 1994
15/$25
6.

UK financial supervision: A radical proposal for reform of UK financial regulation, (prepared pseudononymously
by a senior commercial banker).
May 1994
25/$40
7.

Banking banana skins: The first in a periodic series of papers looking at where the next financial crisis is likely
25/$40
to spring from.
June 1994
8.

A new approach to capital adequacy for banks: A proposal for a market-based alternative, using the concept of
value-at-risk, to the present mechanistic Basle approach to setting bank capital requirements.
By Charles Taylor. July 1994
9.

10.

New forms of Euro-Arab cooperation: A proposal for a new public/private development finance corporation to
25/$40
promote employment-generating projects in the Arab world.
By Jacques Roger-Machart. October 1994
Banking banana skins II: Four leading UK bankers and a senior corporate treasurer discuss lessons for the future
from the last banking crisis.
November 1994
25/$40
25/$40
11. IBM/CSFI essay prize: The two winning essays for the 1994 IBM/CSFI Prize.

November 1994
10/$15
12. Liquidity ratings for bonds: A proposed methodology for measuring the liquidity of issues by scoring the most

widely accepted components, and aggregating them into a liquidity rating.

By Ian Mackintosh. January 1995
25/$40
13. Banks as providers of information security services: Banks have a privileged position as transmitters of secure

data: they should make a business of it.

By Nick Collin. February 1995
25/$40
14. An environmental risk rating for Scottish Nuclear: An experimental rating of a nuclear utility.

By David Lascelles. March 1995
25/$40
15. EMU Stage III: The issues for banks: Banks may be underestimating the impact of Maastrichts small print.

By Malcolm Levitt. May 1995
25/$40
16. Bringing market-driven regulation to European banking: A proposal for eliminating systemic banking risk by

using cross-guarantees.

By Bert Ely (Only photostat available). July 1995
10/$15
17. The City under threat: A leading French journalist worries about complacency in the City of London.

By Patrick de Jacquelot. July 1995
25/$35
18. The UK building societies: Do they have a future?: A collection of essays on the future of UK building societies

and mutuality.

September 1995 (Only photostat available).
10/$15
19. Options and currency intervention: A radical proposal on the use of currency option strategies for central banks.

By Charles Taylor. October 1995
20/$35
20. Twin peaks: A regulatory structure for the new century A proposal to reform UK financial regulation by splitting

systemic concerns from those involving consumer protection.

By Michael Taylor. December 1995
25/$40
21. Banking banana skins III: The findings of a survey of senior UK figures into where the perceived risks in the

financial system lie.

March 1996
25/$40
22. Welfare: A radical rethink - The Personal Welfare Plan: A proposal (by a banker) for the private funding of health,

education, unemployment etc. through a lifetime fund.

By Andrew Dobson. May 1996
25/$40
23. Peak Practice: How to reform the UKs regulatory structure. Implementing Twin Peaks.

By Michael Taylor. October 1996
25/$40
24. Central bank intervention: a new approach: A radical approach to central bank

intervention without foreign exchange reserves.

By Neil Record. November 1996
25/$40
25. The Crash of 2003: An EMU fairy tale.: An all too plausible scenario of what might happen if EMU precedes

economic convergence.

By David Lascelles. December 1996
25/$40
26. Banking Banana Skins: 1997: A further survey showing how bankers might slip up over the next two or three years.

April 1997
25/$40
27. Foreign currency exotic option: A trading simulator for innovation dealers in foreign currency (with disc).

Winner of the 1997 ISMA/CSFI Prize for financial innovation.

By Stavros Pavlou. September 1997
25/$40
28. Call in the red braces brigade... The case for electricity derivatives: Why the UK needs an electricity derivatives

market, and how it can be achieved.

By Ronan Palmer and Anthony White. November 1997
25/$40
29.

The fall of Mulhouse Brand: The City of Londons oldest merchant bank collapses, triggering a global crisis. Can the
regulators stave off the disaster? A financial thriller based on a simulation conducted by the CSFI, with Euromoney and
PA Consulting Group, to test the international system of banking regulation.
By David Shirreff. December 1997
25/$40
30. Credit where credit is due: Bringing microfinance into the mainstream: Can lending small amounts of money to

poor peasants ever be a mainstream business for institutional investors?

By Peter Montagnon. February 1998
25/$40
31. Emerald City Bank... Banking in 2010: The future of banking by eminent bankers, economists and technologists.

March 1998. (Only photostat available).
25/$40
32. Banking Banana Skins: 1998: The fifth survey of possible shocks to the system.

July 1998
25/$40
33. Mutuality for the 21st Century: The former Building Societies Commissioner argues the case for mutuality, and

proposes a new legislative framework to enable it to flourish.

By Rosalind Gilmore. July 1998
25/$40
34. The role of macroeconomic policy in stock return predictability: The 1998 ISMA/CSFI prizewinning dissertation

analyses how government policies affect stock values in markets in Japan and the Far East.

By Nandita Manrakhan. August 1998
25/$40
35. Cybercrime: tracing the evidence: A working group paper on how to combat Internet-related crime.

By Rosamund McDougall. September 1998
6/$10
36. The Internet in ten years time: a CSFI survey: A survey of opinions about where the Internet is going, what the

main obstacles are and who the winners/losers are likely to be.

November 1998
25/$40
37. Le Prix de lEuro Competition between London, Paris and Frankfurt: This report sizes up Europes leading

financial centres at the launch of monetary union.

February 1999
25/$40
38. Psychology and the City: Applications to trading, dealing and investment analysis: A social psychologist looks

at irrationality in the financial services sector.

By Denis Hilton. April 1999
25/$40
39.

Quant & Mammon: Meeting the Citys requirements for post-graduate research and skills in financial
engineering. A study for the EPSRC on the supply of and demand for quantitative finance specialists in the UK,
and on potential areas of City/academic collaboration.
By David Lascelles. April 1999
25/$40
40. A market comparable approach to the pricing of credit default swaps. Winner of the 1999 ISMA/CSFI prize for

financial innovation.

By Tim Townend. November 1999
25/$40
41. Europes new banks: The non-bank phenomenon. A report for euro-FIET on the threat posed by new technology

to European banks traditional franchise.

By David Lascelles. November 1999
25/$40
42. In and Out: Maximising the benefits/minimising the costs of (temporary or permanent) non-membership of

EMU. A look at how the UK can make the best of its ambivalent euro-status.

November 1999
25/$40
43. Reinventing the Commonwealth Development Corporation under Public-Private Partnership.

By Sir Michael McWilliam, KCMG. March 2000
25/$40
44. Internet Banking: A fragile flower Pricking the consensus by asking whether retail banking really is the Internets killer app.

By Andrew Hilton. April 2000
25/$40
45. Banking Banana Skins 2000 The CSFIs latest survey of what UK bankers feel are the biggest challenges facing them.

June 2000
25/$40
46. iX: Better or just Bigger? A sceptical look at the proposed merger between the Deutsche Boerse and the London

Stock Exchange.

By Andrew Hilton and David Lascelles. August 2000
25/$40
47. Bridging the equity gap: a new proposal for virtual local equity markets A proposal for local stock exchanges,

combining Internet technology and community investment.

By Tim Mocroft and Keith Haarhoff.
25/$40
48. Waking up to the FSA How the City views its new regulator.

By David Lascelles. May 2001
25/$40
49. The Short-Term Price Effects of Popular Share Recommendations Winner of the 2001 ISMA/CSFI Essay Prize.

By Bill McCabe. September 2001
25/$40
50. Bumps on the road to Basel: An anthology of views on Basel 2 This colleaction of sixteen (very brief) essays

offers a range of views on Basel 2.

Edited by Andrew Hilton. January 2002
25/$40
51. Banana Skins 2002: A CSFI survey of risks facing banks What bankers are worrying about at the beginning of 2002.

Sponsored by PricewaterhouseCoopers.

By David Lascelles. February 2002
25/$40
52. Single stock futures: the ultimate derivative A look at a new product being introduced almost simultaneously on

each side of the Atlantic.

By David Lascelles. February 2002.
25/$40
53. Harvesting Technology: Financing technology-based SMEs in the UK DTI Foresight sponsored report, which

examines what has been done (and what will be done) on the financing tech-based SMEs.

By Craig Pickering. April 2002
25/$40
54. Waiting for Ariadne: A suggestion for reforming financial services regulation A new proposal for fund management.

By Kevin James. July 2002
25/$40/40
55. Clearing and settlement: Monopoly or market? An argument for breaking the monopoly mindset for ACHs.

By Tim Jones. October 2002. ISBN 0-9543145-1-4.
25/$40/40
56. The future of financial advice in a post-polarisation marketplace A discussion of the structure of financial advice

post-CP121 and post-Sandler, with support from Accenture.

By Stuart Fowler. November 2002. ISBN 0-9543145-2-2
25/$40/40
57. Capitalism without owners will fail: A policymakers guide to reform A comprehensive look at the debate over

transatlantic corporate governance, with detailed recommendations.

By Robert Monks and Allen Sykes. November 2002. ISBN 0-953145-3-0.
25/$40/40
58. Who speaks for the city? Trade associations galore A survey of trade association effectiveness.

By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9.
25/$40/40
59. A new general approach to capital adequacy: A simple and comprehensive alternative to Basel 2

By Charles Taylor. December 2002. ISBN 0-9583145-4-9.
25/$40/40
60. Thinking not ticking: Bringing competition to the public interest audit A paper discussing how the system for

auditing large company financial statements can be made better.

By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5.
25/$40/40
61. Basel Lite: recommendations for the European implementation of the new Basel accord

By Alistair Milne. April 2003. ISBN 0-954145-8-1.
25/$45/40
62. Pensions in crisis? Restoring confidence: A note on a conference held on February 26, 2003

May 2003. ISBN 0-954145-7-3.
25/$45/40
63. The global FX industry: coping with consolidation

Sponsored by Reuters.

By Christopher Swann. May 2003. ISBN 0-9545208-0-7.
25/$45/40
64. Banana Skins 2003 What bankers were worrying about in the middle of 2003.


By David Lascelles. September 2003. ISBN 0-9545208-1-5.
25/$45/40
65.

The curse of the corporate state: Saving capitalism from itself: A proposal, by a leading US corporate activist,
for winning back control of the political process from big corporations, and for giving stakeholders a real say in how
business is run.
By Bob Monks. January 2004. ISBN 0-9545208-2-3.
25/$45/40
66. Companies cannot do it alone: An investigation into UK management attitudes to Company Voluntary

Arrangements A survey into why CVAs (the UKs equivalent of the US Chapter XI) have failed to take off.

By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1.
25/$45/40
67. Regulation of the non-life insurance industry: Why is it so damn difficult? A serious look at the problems of

regulating insurance by a senior practitioner. It is not like banking.

By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X.
25/$45/40
68. Betting on the future: Online gambling goes mainstream financial A look at the future of online gambling and

its convergence with conventional finance - particularly insurance.

By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8.
25/$45/40
69. Banana Skins 2005 Our latest survey of where bankers, regulators and journalists see the next problems coming from.


By David Lascelles. February 2005. ISBN 0-9545208-6-6.
25/$45/40
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.

By Antony Elliott. March 2005. ISBN 0-9545208-7-4.
25/$45/40
71. Surviving the dogfood years: Solutions to the pensions crisis New thinking in the pensions area (together with

a nifty twist by Graham Cox).

By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8.
25/$45/40
72. The perversity of insurance accounting: In defence of finite re-insurance An industry insider defends finite re-insurance

as a rational response to irrational demands.

By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0.
25/$45/40
73. Banking Banana Skins 2006 The latest survey of risks facing the banking industry.


By David Lascelles. April 2006. ISBN 0-9551811-0-0.
74.

Big Bang: Two decades on City experts who lived through Big Bang discuss the lasting impact of the de-regulation
of Londons securities markets.
Sponsored by Clifford Chance.
February 2007. ISBN 978-0-9551811-1-5.
25/$45/40
25/$45/40
75. Insurance Banana Skins 2007 A survey of the risks facing the insurance industry.


By David Lascelles. May 2007. ISBN 978-0-9551811-3-9.
25/$45/40
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.
25/$50/40
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.
25/$50/40
78. A tough nut... Basel 2, insurance and the law of unexpected consequences.

By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3.
25/$50/40
79. Informal money transfers: Economic links between UK diaspora groups and recipients back home.

By David Seddon. November 2007. ISBN 978-0-9551811-5-3.
25/$50/40
80. Microfinance Banana Skins 2008 Risk in a booming industry.

March 2008. ISBN 978-0-9551811-7-7.
25/$50/40
Sponsorship
The CSFI receives general support from many public and private institutions, and that support takes different forms.
In 2007 and the first quarter of 2008, we received unrestricted financial support from:
Barclays Group
Citigroup
JPMorgan Chase

Abbey
Aberdeen Asset Management
Accenture
Alliance & Leicester
AVIVA plc
AXA
Bank of England
BT Global
Building Societies Association
City of London
Euroclear SA/NV
Deloitte
DTCC
DTI
Ernst & Young
Euronext.liffe
Eversheds
Fidelity Investments
Finance and Leasing Association
Financial Services Authority
Fitch Ratings
Futures & Options Association
Halifax plc
Morgan Stanley International

1776 Consulting
Association of Corporate Treasurers
Bank of Italy
Banking Code Standards Board
Brigade Electronics
Chown Dewhurst LLP
FSA Solutions
International Financial Services, London
LandesBank Berlin
Lombard Street Research
NM Rothschild & Sons
The Housing Finance Corporation
The Share Centre
Threadneedle Investments
Watson Wyatt
Winterflood Securities Limited
HM Treasury
HSBC Holdings plc
International Capital Market Association
KPMG
Law Debenture Corporation plc
Lloyds of London
Lloyds TSB
LogicaCMG
London Stock Exchange
Man Group plc
McKinsey & Co
Monitise
Moodys Investors Service Ltd
Nomura Institute of Capital Markets Research
PA Consulting
Prudential plc
Record Currency Management
Reuters
Royal Bank of Scotland
Standard & Poors
Swiss Re
Z/Yen
Zurich Financial Services
We also received important support in kind from, inter alia:

EFG Private Bank
Financial Times
GISE AG
Linklaters

The CSFI also received special purpose support during 2007/08 from, inter alia:
Bank of America
BVCA
Brunswick Group
CGAP
Citigroup
Cityforum
Clifford Chance
Edgar Miller
Farrer & Co
UK 25
US $50

40
CSFI
2 0 0 8
FOA
ifs School of Finance
International Capital Market Association
JPMorgan
Martin Hall
Morgan Stanley
Open Europe
Optimum Population Trust
CSFI
Registered Charity Number 1017353

Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE
Registered in England and Wales limited by guarantee. Number 2788116

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Banking

Centre for the Study of

C S F I / New York CSFI

CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or

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

C S F I / New York CSFI

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

About this survey

The responses by country were as follows:

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

The Top Ten Banana Skins 1996-2008

Equity market crash

Too much regulation

Too much regulation

Poor risk management

Complex financial instruments

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

C S F I / New York CSFI

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

C S F I / New York CSFI

2. Credit risk (2)

The bursting of the

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

5. Macro-economic trends (14)

5. Macro-economic trends (14)

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

C S F I / New York CSFI

Although all major financial

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

C S F I / New York CSFI

Catch up. Respondents said that risk

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI

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

C S F I / New York CSFI