NZ banks fear Europeanmeltdown

Report outlines risks andworries

New Zealand’s banking industry is becoming increasingly worried that businesses and consumers will begin defaulting on their debts if the European sovereign debt crisis plunges the global economy into another recession.

That’s according to the latest Banking Banana Skins report, a semi-regular survey of the global banking industry and the risks it faces, conducted by Centre for the Study of Financial Innovation – a London-based non-profit think tank.

The study polled more than 700 respondents across more than 58 countries during November and December last year, including 22 from New Zealand and 13 from Australia.

The study found that the level of anxiety among local banks, ranked lowest (1) to highest (5), came in at 3.38, outpacing the global average of 3.15, which itself was at its highest level since survey started in 1996.

Pricewaterhousecoopers, which commissioned the study, said fears around credit were not surprising given that the country’s five major retail banks had incurred impaired asset charges of $3.9 billion, or about 38 per cent of pre-tax profits, over the past three financial years.

The availability of funding was the next-biggest fear among New Zealand bankers, with deteriorating funding markets in Europe having already forced many to tap the local corporate bond market in 2011.

That saw New Zealand corporate bonds among the top-performing global asset classes last year, delivering a total return of just over 9 per cent.

However, the size of the local debt market has left a question mark over how banks will fund their operations if offshore debt markets continued to be squeezed.

The third-biggest concern by New Zealand’s banking sector was macroeconomic risk, principally around the impending global recession, followed by political interference and capital availability.

Those fears were matched by global respondents, albeit in a different order: macroeconomic risk, credit risk, liquidity, capital availability and political interference.

Australia’s view of the risks differed somewhat, with regulatory risk the biggest perceived ‘‘banana skin’’, followed by macroeconomic risk, political interference, credit risk, and lastly by a high dependence on technology.

The report noted that there was an overall concern about a repeat of the 2008 global financial crisis, with the eurozone, as opposed to Lehman Brothers, likely to trigger the next major round of volatility.

By contrast, the risks that saw the biggest declines were interest rates (with little volatility expected), emerging markets (seen as increasingly more stable than their developed peers), and payment systems.

Although the report was heavily steeped in doom and gloom, one strong positive was how well banks are placed to deal with the risks. Asked to rank how well-prepared their organisations were, from least prepared (1) to well-prepared (5), the survey found an average response of 2.96, with New Zealand at 3.25, reflecting the work banks have done on risk management since 2008.

Breaking down the headline results, bankers rated their preparedness at 3.13, regulators at 2.92 and observers at 2.62.

The survey also highlighted several areas where New Zealand’s banking sector differed from the global average.

These included concerns around technology and the creation of alternative methods of intermediation, criminality and fraud, a tightening skills pool, and commodity price volatility.

The risks which declined the most versus the international average were corporate governance and back office, which is seen as more of a concern for large multinationals.