| Credit risk tops concerns for Irish bankers |
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| The banking industry faces its most stressful period for ten years with the onset of world economic recession and the danger of escalating bad debts. This warning comes in a poll of top bankers, regulators and analysts from 15 countries, including Ireland. |
The survey, released in February 2002, and conducted by the Centre for the Study of Financial Innovation, in it’s annual ‘Banana Skins’ survey, identifies 30 potential sources of risk to banks, and ranks them by severity. Credit risk tops the list because of the likelihood of severe loan losses resulting not just from recessionary forces, but also from what are seen as poor lending decisions in the heady days of the 1990s. The strong showing by complex financial instruments, which came in fourth, reflects sharpening concern about credit derivatives, which are increasingly seen as a potential rogue product, capable of transmitting risk to unwitting parts of the financial system if not properly managed. Business continuation and insurance also featured in the top ten, largely due to the effects of September 11th, though insurance is also emerging as a problem area for other reasons - capitalisation, poor regulation and the strains on the life insurance side. Also striking is the emergence of regulation as a top-level concern. Domestic regulation shoots up to sixth place, while international regulation scores high marks because of the growing perception that the Basel Capital Accord process could turn prove particularly troublesome.
The survey, which was conducted in December 2001 places the risk caused by a rogue trader in 24th position and the accompanying report describes it as being an issue that is ‘distinctly passe’. Although the past few weeks have proven that a rogue trader is distinctly ‘de jour’.
What is also notable is what isn’t in the top ten. All the e-strategy concerns that dominated the last survey in 2000 have disappeared, as have worries about the challenges posed by new entrants to the banking business. Back office and payment systems are also low order concerns, as is environmental risk despite fears of global warming.
However, the survey also uncovered more encouraging news. 72 per cent of the respondents thought financial institutions were at least moderately well prepared to handle the perceived risks, up from only 51 per cent in the 2000 survey. Much of this increase was due to bankers themselves expressing greater confidence in their ability to identify and manage risk, but regulators and analysts also gave a more upbeat response citing stronger capitalisation of banks and better risk management techniques. David Lascelles, CSFI co-director said, ‘This survey shows that survival issues now top the banking agenda, though there is also an encouraging level of confidence that banks will be able to withstand the stresses.’
The top ten since 1996 charts the changing concerns. Broadly, the mid-to late 1990s focused on the quality of management and strategy as new challenges loomed - technology, fresh forms of competition and new products. By 2000, concerns about market excesses were rising rapidly -the risk of an equity market crash was number one, culminating in the latest survey where direct survival issues top the list. |
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| Article appeared in the February 2002 issue.
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