Concern rising among Canadian bankers about risk with social media, interest rates

The Centre for the Study of Financial Innovation (CSFI) recently released its 2014 “Banking Banana Skins” report, in which Canadian respondents expressed a heightened concern about technology risk, social media, cybercrime and interest rates and less concern than two years ago about liquidity and availability of capital.

London-based CSFI, which released the Banking Banana Skins 2014 survey in association with PriceWaterhouseCoopers, based the report on 656 responses to a survey of individuals in 59 countries. Forty-five respondents were from Canada.

Respondents were asked to “describe, in their own words, their main concerns about the financial system over the next 2-3 years.” They were then asked to look at a list generated by CSFI and PwC of potential risks, or “banana skins,” and rate each one on a scale of 1 through 5, where 5 is most the most severe.

CSFI broke down the averages worldwide and PwC Canada listed the average scores of Canadian respondents. The previous Banana Skins survey was published in 2012 and the first was published in 1996.

While regulation was the third “most pressing” concern among Canadian respondents in 2012, it was the most pressing concern this year. Meanwhile, technology risk – ranked 13th in 2012 – was the second-highest concern this year.

Technology risk is “driven by the expansion of mobile banking, new payment technologies and the increased data requirements arising from the regulatory environment,” PwC Canada stated in a press release.

Meanwhile, the risk of “criminality” rose from 21st place among Canadian respondents in 2012 to fourth in 2014.

Criminality included the risk of fraud, rogue trading, money laundering and other types of crime. This risk is “closely associated with the increasing threat of illegal cyber activity which is also covered in technology risk,” CSFI noted in the report.

 “I have long been a cynic about that, believing it to be more like pilferage at Wooldworth’s than Armageddon,” CSFI director Andrew Hilton wrote of cybercrime in a forward to the report. “However, its progress up the charts suggests the actual risk is finally starting to live up the hype.”

CSFI quotes a “senior regulator in Canada” as warning that “even in financial institutions which devote considerable resources to fighting cybercrime, the growing sophistication of perpetrators and the ease and speed with which information can be transmitted electronically makes it very difficult to foresee all the avenues that can be exploited, and to develop appropriate safeguards.”

Social media, which was not on the banana skins list in 2012, was the 13th most pressing concern of Canadian respondents this year. This concern reflected a “low, though guarded, concern about the potential impact of Twitter, Facebook etc. on bank business and reputations,” according to the report. CSFI quoted a regulator in Canada as saying companies today “are at even higher risk of suffering reputational harm from poor business conduct or customer relations, even in cases where these are isolated events.”

Regulation was the most pressing concern among respondents, worldwide and in Canada.

“With regulatory requirements increasing exponentially since the economic crisis, it’s no surprise that concerns about the number of regulatory requirements, cost of compliance and balancing the cost of running a business, position regulation as the highest risk to the industry,” PwC and CSFI noted of the Canadian results. “Many respondents felt regulatory change had gone too far. One Canadian bank director referred to is as a ‘gotcha attitude against banks.’”

Another pressing concern about respondents was the ability for both banks and borrowers to adjust to an increase in interest rates. This was the fifth most pressing concern for Canadian respondents, up from 19th in 2012.

In the report, the vice president of a Canadian bank is quoted as saying that rates will increase and financial institutions “are increasingly dependent on sales of products and liquidity strategies that are highly rate sensitive without fully appreciating how they will react under stress.”

Liquidity, which was the second-most pressing concern among Canadian respondents in 2012, dropped to 14th place this year. The concern around capital availability dropped from fourth place in 2012 to 20th this year.

Worldwide, liquidity dropped from third place in 2012 to 15th place in 2014 while capital availability dropped from fourth place in 2012 to 10th in 2014.

“Although risks associated with banks’ need to rebuild their capital appear to be receding with the improved financial climate, this is still widely viewed as a problematic area, both as to the amount of capital available, and the impact of rising capital requirements on bank behaviour.”