Peeling the Banking Banana: Top banking challenges in 2016

The Centre for the Study of Financial Innovation in New York, together with PwC, released their 2015 Banking Banana Skins report at the end of 2015. The report surveyed 672 of the world’s top bankers, regulators and analysts across 52 countries to identify banking challenges for the year ahead as well as the risks they see facing the industry.

The 2015 report confirms previous fears about the importance of external risks impacting the banking industry. The world economy is a top concern for bankers, with high debt, interest rate uncertainty and emerging market slowdowns reported as being the most worrisome of all external risks. An interesting finding for this year relates to technology risk and criminality, both now in the top five concerns for bankers alongside tightening regulatory requirements and political interference.

Banking Banana Skins Report 2015 (2014 rankings in brackets)

1Macro-economic environment (3)
2Criminality (9)
3Regulation (1)
4Technology risk (4)
5Political interference (2)
6Quality of Risk Management (3)
7Credit risk (7)
8Conduct practices (16)
9Pricing of risk (6)
10Business model (-)
11Social media (19)
12Reputation (-)
13Capital availability (10)
14Interest rates (12)
15Emerging markets (17)
16Shadow banking (20)
17Currency (22)
18Liquidity (15)
19Corporate governance (8)
20Management incentives (21)
21Derivatives (18)
22Human resources (23)
23Reliance on third parties (24)
24Sustainability (25)

We’ve outlined the top five concerns for further discussion based on the 24 key concerns highlighted in the report.

What are the top five banking challenges as expressed by bankers ahead of 2016?

 

#1: Macroeconomic risk

Macroeconomic risk was the top concern for all survey respondents despite the fact that many economies have now returned to positive growth. For bankers, uncertainties in the macroeconomic environment together with persistent and high levels of debt across sovereign, corporate, and consumer sectors lay the groundwork for asset bubbles to burst in the event of significant instability. Specific concerns for 2016 include a declining Chinese economy and resulting impacts on the world economy, slower growth rates in emerging economies, unresolved conditions in the eurozone, and a lack of clarity over the future of interest rates.

TL;DR (Too Long; Didn’t Read): Macroeconomic risk is the top concern for bankers, risk managers, and analysts surveyed who are concerned current positive growth is the result of artificial conditions created by low interest rates, and that the prospects of a recession/deflation are strong.

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#2: Regulation

Although slightly less of a concern for risk managers and industry analysts, bankers cite tightening regulatory requirements as sometimes costly, excessive, and ineffective. While bankers recognize the need for tougher controls, concerns were raised about the volume and complexity of current regulation which were stated to eat into management time and overall industry margins. Bankers were also concerned about the impact of rising regulatory requirements on innovation and diversity, as well as their ability to compete effectively against smaller players who are not exposed to the same regulatory scrutiny.

TL;DR: Although many banks have become more risk aware and are adapting well to increasingly stringent requirements, regulation continues to be a concern for banks who must invest a sizeable amount of time, effort, and money into meeting compliance standards.

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#3: Political interference

Bankers expressed concern that governments could intervene in banking operations for a multitude of reasons, including to raise revenues in a time of budget stress, increase investor protection, and rebuild the national tax base. Bankers also highlighted that the uncertainty in several political environments including in Europe and across the Middle East, as well as the impact of the upcoming U.S. elections, could result in greater interference over banking management, lending policies, and taxation.

TL;DR: Bankers are aware of the potential for greater political interference in how they manage their operations, lending policies, and taxation based on a host of macro and microeconomic factors.

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#4: Technology risk

Of all the most urgent concerns, outdated core IT systems were a significant concern for global bankers. Failure to invest appropriately in secure, agile systems that can enhance digital and mobile banking can result in significant loss while compounding the risk for cyber attacks (see #5 below). According to Alexander Campbell, editor of Operational Risk & Regulation Magazine, “the burden of multiple legacy systems at some banks (due to a history of mergers) is already causing real problems.” Additionally, banks face serious competition from a host of disruptive innovators who are able to provide customers with seamless and more affordable experiences across a variety of channels.

TL;DR: Large banks who fail to innovate risk losing a significant amount of business. This is especially true for banks that struggle with core legacy systems that are unable to facilitate the kind of experience, service, and product selection customers expect.

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#5: Criminality

Cyber attacks are increasingly seen as a top concern for bankers. Many respondents worried that banks are not currently equipped to prevent attacks from opportunistic hackers, organized criminals, or government-funded corporate (IP) espionage. The concern is further compounded by banks’ increased embrace of newer (and potentially high-risk) tech including distributed ledgers, crypto-currencies, and real-time payments. Respondents were concerned about how under-investments in banking technology systems leave the industry vulnerable to potentially large and crippling attacks. Even banks with strengthened technology systems are only as strong as their weakest link, rendering them vulnerable to cyberattacks from a multitude of sources.

TL;DR: Cyberattacks on key financial infrastructure could leave banks vulnerable to significant financial, regulatory, and reputational risk.

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In our next blog post, we focus on banking challenges in North America as part of our Peeling the Banking Banana based on the 2015 Banking Banana Skins report.

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