Regulation Driving Banks Bananas

February 04 2010

By : Peter Ryan, ABC News

At the height of the global financial crisis, banks around the world - with the notable exception of Australia - were bailed out by governments at massive expense to taxpayers.

But now as banks begin to recover, courtesy of government intervention, many are complaining about political interference from their rescuers.

A study out today from the Centre for of the Study of Financial Information and the accounting firm PricewaterhouseCoopers rates the politicisation of banks as the number one risk facing the global banking industry.

The annual "Banking Banana Skins" survey, which polled 443 bankers, regulators and observers put credit risk and excessive regulation as the other top two threats to a sustained recovery.

According to the survey, bankers worry that political oversight could distort their lending decisions while non-bankers, such as regulators, believe bank rescues have created moral hazard with expectations that banks will always be bailed out by governments.

In Australia, the prospect of excessive regulation was ranked the most serious risk. No Australian bank was bailed out during the global financial crisis unlike major banks in the US, Britain and Europe which would have collapsed without government intervention.

Despite dodging a banking bullet, Australian bankers have already expressed concerns that fresh regulations such as the proposed new liquidity rules could stifle the economic recovery. PricewaterhouseCooper's banking leader Mike Codling says the concerns about political intervention by non-Australian banks provide a twist to banking attitudes given the moral hazard fears from respondents.

"It's ironic that politics should emerge as a risk to banking when in fact many banks had to be rescued courtesy of politicians and public funds," Mr Codling said. "But clearly the relationship between banks and the wider community has been severely weakened, particularly in the US and Europe.

"Rebuilding trust is going to take years and the risk is that until it is, banks will operate under financial handicaps."

The survey ranks the fragile state of the global economy and the risk of severe credit losses as another threat to a worldwide recovery.

Respondents were concerned about a double-dip recession, and that government action to pump liquidity into the markets had inflated an 'asset bubble' which could burst with damaging consequences.

"This year's survey is a well timed reminder that the cumulative effect of current regulatory initiatives may have unintended consequences. Regaining the confidence of the regulators is critical if bankers want to control their own destiny," Mr Codling said.

However, the survey points to complacency as a major underlying risk as the global banking sector begins to recover.

Mike Codling says respondents were alarmed by a growing "business as usual" attitude of banks, despite the challenges of stabilising the banking sector and economies.

"Clearly many politicians hold the view that behaviours haven't changed and short-term habits will return. From a banker's perspective, they don't want to waste a good crisis," he said.

"Part of that is demonstrating that they've genuinely learnt from their mistakes."

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