Concerns about uncertainties in the macro-economic environment, regulation and criminality rank high on the risk agenda of South Africa’s banking executives and industry observers, according to the recent Banking Banana Skins survey.
Every two years the Centre for the Study of Financial Innovation (CSFI) produces the survey in association with PwC, which ranks 24 of the industry’s most topical risks based on participant’s responses. The study is based on responses from more than 670 bankers, banking regulators and close observers of the banking industry in 52 countries, including 14 from South Africa.
Johannes Grosskopf, Head of Banking & Capital Markets for PwC Africa, says, “Worldwide, uncertainties in the macro-economic environment present the main threat to the recovery of the global banking system, according to this year’s Banana Skins survey of banking risk. Furthermore, criminality and technological risks are becoming increasing concerns to banks given the rise of cyber-crime and new competitors who are challenging the traditional mode of doing things and who operate using more nimble systems and lower overheads.”
In South Africa, regulation continues to rank high at No. 2 (Global: 3), followed by criminality at No. 3 (Global: 2.) Banks are highly vulnerable to the growth in financial crime, particularly cybercrime as cybercriminals tend to target the weak links in a closely interwoven worldwide banking system. The ability of banks to manage the growth in crime is also under discussion, as shown by strong concern about technology risk (Global: 4; South Africa: 6) and of their risk management abilities (Global: 6; South Africa 12.)
Globally, a fast-rising concern is over banks’ business conduct practices (Global: 8; South Africa: 15) because of what is perceived to be the banks’ failure to achieve sufficient ‘culture change’ in the management of their business practices despite strong regulatory pressure and heavy fines in recent years.
In South Africa, there was particular concern about the threat from a slowdown in emerging markets, which at No. 4, was ranked 11 places higher than the global average. Respondents noted that stress in emerging markets is increasing credit and market risk pressure on banks’ asset quality.
Other concerns noted by South African respondents were credit risk (No. 5,) the outlook for interest rates (No.7) and the impact of currency volatility (No.8.) Additionally, the risk that banks will have difficulty attracting and retaining talent remains high (No. 9.)
On the other hand, the risk of political intervention in the local banking sector has declined (down from No. 1 in 2014 to No. 10.) It is interesting to note that in South Africa risks associated with social media has also declined (from No 8 to No.14,) unlike globally where it is has risen significantly (No. 11) because of the potential reputational damage that social media can cause to banks, and the pace with which this can be inflicted by an increasingly social stakeholder base.
A number of institutional risks such as the quality of risk management and corporate governance (Global: 19; South Africa 21) were ranked lower than in other regions.
Grosskopf adds, “Although much work has been done by the banks and their regulators to strengthen risk controls, banks still have more to do to address the scale of risk and its dynamic nature. The survey shows a fairly strong global consensus that the main threats to banking safety come from areas such as criminality and technology risk.