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Financial sector points out credit risk

The seventh Banana Skins survey of the financial services sector reveals that events surrounding 11 September and Enron have had a major influence over concerns for the industry.

Overall, changes in the operating environment were the 175 respondents’ biggest worry for the future. And topical issues such as disaster recovery, business continuity and the ability of the insurance industry to cope have shot up the list since it was last compiled in 2000.

Worries over the vulnerability of landmark office blocks to further terrorist attacks were at the fore. Angela Knight of APCIMS said: “City institutions mostly have their emergency recovery and back-up in inaccessible and vulnerable Canary Wharf. In any 11 September-type event, the whole system will be lost.”

Heading up the list of major concerns are credit risk and macro-economic uncertainty. One head of group risk at a UK clearer said: “My over-riding sense at the beginning of 2002 is of a greater level of uncertainty, both short-term and longer-term than I can remember for many years.” This is not just because of the threat of recession, but also because of the many lending decisions made during the late 1990s dotcom boom that are widely perceived as poor, the survey claims.

Almost all respondents had anxieties about the quality of loan portfolios, with some indicating that particular sectors, such as telecoms and aerospace, were the major culprits. But overall, the spectre of Enron was at the forefront of most respondents’ minds. David Llewellyn, professor of banking at Loughborough University, said: “The US has a potential debt time bomb which, were it to explode, would be serious for the economy.” He described it as a culture of “low probability-high seriousness” that encourages “disaster myopia”.

Complex financial instruments have also climbed up the list, from number ten in 2000 to the number four spot in 2002. Specific accounting standards have historically been too technical to make the Banana Skins list, but FRS17 (on pensions) could hit company finances hard, according to the survey. One investment banker said the predicted move of assets from equities to bonds “will result in a massive drainage of funds from the UK equity market and thus dramatically increase the cost of capital to UK quoted companies.” He claims this will have the effect of “undermining our competitive position in the international marketplace.”

Neil Record of Record Currency Management also predicts that FRS17 “will cause the insolvency of one or more major companies: for example BA, Marconi and BT”.

One Banana Skin would be further up the list if the survey was re-run. The threat from rogue traders, currently occupying 24th place, may well seem more important to bankers since Allied Irish reported in February that an employee at its US subsidiary had run up a $750m bill during unauthorised trading.

Banana Skins 2002 is published by the Centre for the Study of Financial Innovation. It is available from Leanne Wiltshire at [email protected]

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