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BANKING: SA Banking Executives Concerned Over Fraud & Economic Crime


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Globally the risk of another economic recession and a renewed banking crisis is high, according to a report of the dangers currently facing the banking industry, whereby SA banking executives are worried.

The Centre for the Study of Financial Innovation’s (CSFI) annual Banking Banana Skins survey, produced in association with Professional Services Firm PwC, places macro-economic risk and credit losses at the top of the list of 30 possible risks to banks globally. The main cause of anxiety is the eurozone debt crisis which contains the threat of sovereign default by several countries. The first consequence of a default would be large credit losses, which appear at No. 2 on the list, closely followed by a funding crisis whereby banks are cut off from access to liquidity (No. 3) and fresh capital (No. 4).

The CSFI’s annual Banana Skins study is based on responses from more than 700 bankers, banking regulators and close observers of the banking industry in 58 countries including seven from South Africa, and ranks 30 risks according to their severity. The study is carried out every second year.

The 2012 annual Banking Banana Skins survey shows that banking executives in the emerging markets are more positive in their outlook about the financial services sector than the industrial countries as many of these countries are currently in better financial health.

Banking executives from regions such as Latin America, Africa, Asia and the Far East ranked their prospects more positively than North America and Europe largely due to stronger growth, even though they felt vulnerable to global banking shocks. The report does, however, show some rising concern about the prospects for China as its economy slows and its banks face growing pressures.

Tom Winterboer, Financial Services Leader, PwC Southern Africa and Africa, says: “South Africa’s banking sector has held up well in the face of the global financial crisis of 2008. This is largely due to tight regulation ,good governance and being well capitalised .”

Johannes Grosskopf, Banking and Capital Markets Leader, PwC Southern Africa, says while banks in the rest of the world cite the shortage of liquidity and the availability of capital as their prime concerns, South Africa’s banking industry faces different concerns to those of their international counterparts.

Technology Dependence a Concern for SA Banking Executives

The survey shows that one of the top concerns facing South Africa’s banking industry is the sector’s growing dependence on technology (No. 3). This is not surprising given the rise of electronic and online banking channels coupled with banks replacing legacy systems. On the one hand the industry is trying to use technology to become more efficient, but this has to be balanced against their concerns about fraud and the huge costs involved in fighting this crime, says Grosskopf. “Dependence on technology in the banking industry is huge, with banks having to invest significant amounts in implementing new systems to defend themselves against fraudulent activity. There has also been a sharp awareness around the potential dangers of cyber crime and hacking, and the huge financial and reputational damage, such economic crime can cause,” he says.

The risks of fraud and criminality are placed in fourth and fifth places respectively in South Africa, compared to 27th and 24th respectively globally. “A difficult economic climate usually leads to higher incidents of fraud. Criminals are becoming increasingly sophisticated, particularly in the electronic world at a time when more financial business is going digital,” says, Grosskopf. PwC’s Forensic Service Practice carried out research in December last year, which shows that a significant percentage of companies (60%) were victims of one or more frauds in the last 12 months. The financial services sector is particularly vulnerable to economic crime, says Grosskopf.

The South African response to liquidity risk is significantly more positive than the survey average, perhaps indicating the sector’s relative distance from the eurozone debt crisis, says Grosskopf. It is of a much lower concern here, placed at number 17 on the index, compared to being one of the top concerns ranked by respondents overseas (No. 3).

Worldwide Regulatory Oversight Top Concern for SA Banking Executives

Worldwide regulatory oversight continues to be one of the top concerns facing the sector. The risks include higher costs, management distraction, constraints on profitability and the capacity to lend. Grosskopf says that the most significant change taking place in the South African banking industry will be the introduction of Basel 3, which is expected to have an effect on the trading book and funding models of banks. In addition to Basel 3, banks will have to come to terms with the provisions of the new Companies Act, compliance with International Financial Reporting Standards and the proposed Protection of Personal Information Bill . “In response, we can expect to see a significant increase in resources, particularly in that of risk management and compliance, in this regard, South Africa will simply be reflecting the global norm.”

Several ongoing international reforms will also require local banks to reconsider their models. These include the US Foreign Account Tax Compliance Act (FACTA), a US based legislation aimed at identifying US citizens with income in foreign jurisdictions, and the Financial Stability Board Framework.

Concerns about political interference in South Africa is rated at number 10, compared to one of the top concerns (No. 5) it occupies globally. The report suggests a reason could be that intrusion by governments in banking is now a fact of life, be it in the form of nationalisation, tougher regulation, new taxes or pressure on business decisions.

Although bankers and regulators agree on the macro-economic situation, and the credit and liquidity risks affecting the banking system, they have divergent views on the potential risks. The SA banking executives placed the perception of regulatory and political risk as very high on their list, while the regulators put this at the bottom of their list.

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