The fragility of the world economy with the possibility of a return to the recession poses the greatest risk to the banking industry.
The Centre for the Study of Financial Innovations (CSFI) annual Banking Banana Skins survey, produced in association with Professional Services Firm PwC, places macro-economic risk and credit losses at the top of the list of 30 possible risks to banks globally.
The report describes the risk outlook for the banking industry at the turn of the year, a time of unprecedented stress in the financial markets. The findings are based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries, including seven from South Africa, which ranks 30 risks according to their severity.
The concerns of banks have changed over the past 15 years. The 1990s were largely dominated by strategic issues, such as new developments in technology and competition. The 2008 survey, conducted at the height of the financial crisis, brought the focus sharply onto credit and market risks, propelling two new entrants to the top of the charts: liquidity and credit spreads. The 2010 report showed a preoccupation with the crash aftermath, namely lingering debt and funding problems.
The 2012 Banking Banana Skins survey shows that banking executives from regions such as Latin America, Africa, Asia and the Far East are more positive in their outlook about the financial services sector than the industrial countries, as they are in better health. The concern about the global macro economy is their biggest worry.
While South Africa's banks may be better prepared than other jurisdictions to handle some of these risks, the economy is too intertwined with the global banking system to remain totally unaffected, particularly if the global economy moves into another recession. Bankers and investors are also concerned about the contagious effect of a default in troubled markets, particularly those in the US and Europe.
While banks in the rest of the world cite the adequacy of liquidity and capital as major concerns, South Africa's banking industry faces different concerns to those of its international counterparts.
The report shows that one of the top concerns facing South Africa's banking industry is the sector's growing dependence on the use of technology (ranked number 3). Banks are increasingly realising that they have to invest in modern technology to improve customer service and to keep up with competitors in a highly competitive environment. They are well aware that investing in technology presents both benefits and risks. Concerns are around the level of management's understanding of technology and the industry's dependence on a few key people. Other concerns include the increasing sophistication of hackers, which can cause financial and reputational damage to a bank.
Banks in South Africa are also worried by the increasing level of fraud taking place in the industry.
The risks of fraud and criminality are placed in fourth and fifth places respectively in South Africa, compared to 27th and 24th respectively globally. Economic uncertainty usually leads to higher incidences of fraud. Insider fraud and account takeover are the two most likely areas of exposure for banks. Fraudsters have become more sophisticated and in some instances are operating as organised syndicates, even targeting the employees of banks. Cheque fraud, electronic fraud, cash fraud, theft of credit cards, fraudulent loan applications and theft of personal information are just some of the trends that are taking place in the industry, exacerbated by advances in technology.
Banks are looking for robust fraud prevention and detection measures. Prevention includes policies, procedures and training of employees to stop fraud taking place. On the other hand, detection focuses on various techniques that recognise whether fraud has taken place and if it is occurring. Common detection controls include data analysis that raises ‘red flags' on abnormal transactions and effective whistle blower procedures. Banks have to update their risk management and governance practices continuously to keep up with these and other emerging trends.
The risk of hacking, cyber attack and theft of confidential information are also placed high on the agenda of the banking industry. Banks are placing strong controls in place, with regulators keeping a close eye on matters such as money laundering.
Worldwide the banking sector continues to see new regulations as one of the top concerns facing the industry. The most significant change taking place in the South African banking industry will be the introduction of Basel 3, which is expected to change business models as banks try to comply with the more stringent capital rules on their trading activities and seek long term funding to comply with the new liquidity measures being proposed.
Furthermore, banks will have to come to terms with the provisions of the new Companies Act, compliance with proposed changes to International Financial Reporting Standards and the proposed Protection of Personal Information Bill. Another fast rising risk in South Africa is business continuation at No. 6. A question on human resources was included for the first time in the Banana Skins report this year because there seemed to be raising concern about banks losing “talent” since the financial crisis of 2008, for a number of reasons. The risk in South Africa was cited as a concern (No. 9), whereas internationally it was not perceived to be a large one (No. 28). Concerns are largely around squeezes in remuneration, the recruitment and retention of high quality staff and attracting young talent into the industry.
Concerns about the growth of political interference in the industry have come down from the top position it occupied in the most recent survey. The study suggests a reason could be that globally intrusion by governments in banking is now a fact of life, be it in the form of nationalisation, tougher regulation, new taxes or pressure on business decisions.
Although banks have made significant changes to their organisations and the way in which they run their businesses in the light of the 2008 financial crisis, the latest set of risks have become more challenging for the sector. asa
Author: Johannes Grosskopf CA(SA) is the PwC Banking & Capital Markets Leader.