The CSFI’s annual “Banking Banana Skins survey”, produced in association with PwC, puts macro-economic environment at the top of the 30 possible risks to Luxembourg banks. The results reflect the views of a poll representing the different business models existing in the Luxembourg financial place.

On a global perspective, the 700 respondents from 58 countries over the world showed considerable concern about the state of the economy and banking markets, particularly the uncertainties about the euro, the growing cost of regulation and failing trust in banks. The shock of a euro collapse would hit banks not just in Europe but in all major regions of the world. Bankers in countries such as the US, Canada, China, Argentina and Australia put the euro crisis at the top of their list of concerns.

 

For the first time, the “Banking Banana Skins survey” shows the risk outlook to be better in the emerging economies than in the industrialised world. Respondents from regions such as Latin America, Africa, Asia and the Far East ranked their prospects more positively than North America and Europe thanks to stronger growth, though they felt vulnerable to global banking shocks. However, the survey also showed mounting concern about the prospects for China as its economy slows and its banks face growing pressures.

“Many of the top risks identified by Luxembourg respondents matched those at the global level, but their order highlights some local specificities: it appears that there is a greater concern regarding the impact of current difficulties upon bank profitability and the rise in regulation”.
Thierry López, partner and Risk Management Services Leader, PwC Luxembourg.

 

 

The most significant results for Luxembourg include:

• Macro-economic and credit risks:

Luxembourg bankers are in line with their peers. The fragility of the world economy is the greatest risk for the banking industry. This is mainly due to the crisis in the eurozone and mounting debt problems in many of the world’s largest economies. The biggest concern is the sovereign debt both in the industrialised world and in emerging countries. On top of the list is the eurozone, with concerns about Greece and other countries.

• Profitability:

Profitability has become a long-term issue for banks. Earning expectations have to be managed down consequently to the new markets conditions, including higher capital requirements and regulatory and compliance costs.

• Regulation:

Continuously growing regulations and the customer protection agenda are supposed to make banks safer. However, bankers perceive them as additional costs which contribute to the mounting pressure on margins. The results of the survey show that profitability and regulation are risks that go hand-in-hand for bankers.

• Liquidity:

A liquidity risk is not a threat but a fact for many banks, notably in the eurozone. Some banks can no longer finance themselves in the markets and have been forced to turn to their central banks. In Luxembourg, the latest Quantitative Impact Study (QIS) conducted by the CSSF and the BCL showed that only eight banks out of 59 surveyed fulfill both of the new liquidity ratios.

“Besides these issues, the study collected the opinion of respondents about the preparedness of the sector to handle the risks identified. Luxembourg scored 3.0o for preparedness vs. a world average of 2.96. This result indicates that banks continue to gear up. One of the solutions includes assessing their business models in the current environment, with regards to new clients’ needs and regulations.”

Rima Adas, partner and Banking Leader, PwC Luxembourg