Political interference is banks' biggest risk

Bankers are complaining that political interference is now the biggest risk facing the banking industry, a report published this morning will say.

"Politicisation" of banks as a result of bailouts and takeovers now poses a "major threat" to their financial health, according to some 450 senior figures who contributed to the annual Banking Banana Skins report from PricewaterhouseCoopers (PwC) and the Centre for Financial Innovation.

It is the first time in 15 years of the study that "political interference" has even featured as a significant risk, let alone coming top. The 450 respondents hail from 49 countries and include bankers, close industry observers and regulators. But all shared the view, although for different reasons, says PwC.

"Bankers saw politics distorting their lending. Non-bankers said rescues had damaged banks by encouraging reckless attitudes. Regulators worried that governments would withdraw their support from banks before they had time to rebuild their financial strength," PwC said.

The top risk is closely related to the third – "too much regulation" – and the concern that banks will be further damaged by an over-reaction to the crisis. Several bankers have publicly complained about political interference – notably the Royal Bank of Scotland's chief executive Stephen Hester, who argued that the politicisation of RBS was hampering its recovery and would harm the taxpayer by making it more difficult for the Government to make a return on its investment. However, Mr Hester did later say that he regretted his words.

The sector's critics have argued that politicians have not gone far enough in reining in a sector which sought to return to business as usual by paying huge bonuses just months after taxpayers across the developed world were forced to inject billions to keep it afloat.

The culture of excess has led to the Chancellor, Alistair Darling, imposing a one-off 50 per cent supertax on banks' bonus pools. A similar measure has also been proposed in France, while the US President, Barack Obama, wants to introduce a levy on banks to recoup US taxpayers' funds and is proposing to ban deposit-takers from the most risky activities of "casino capitalism".

There is a certain irony in the bankers' complaints, admits David Lascelles, the editor of PwC's survey. "It is ironic that politics should emerge as a risk when the banks had to be rescued in the first place," he said. "But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap."

John Hitchins, PwC's UK banking leader, said: "With political interference as the top risk and too much regulation at number three, the concern is that the financial crisis has taken the bank industry's future out of its own hands."

Other dangers on the list include credit risk (at number two) and the economy (at number four). A lack of liquidity fell to number five from last year's top spot, while the availability of capital was a new entrant at number six. Derivatives fell from four to eight, with the final three made up of risk-management quality, credit spreads and the performance of equities.