Page 37 - EBA 2013.2869 Risk Assesment Report final proof4

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R I S K A S S E S S M E N T O F T H E E U R O P E A N B A N K I N G S Y S T E M
35
7. Consumer issues
and reputational concerns
A number of detrimental business practices
of European banks have recently come to
light and affect consumer confidence, leading
to adverse implications not only on the banks
involved, but also on the banking sector as a
whole. These incidents concern detrimental
behaviour and inappropriate conduct of vari-
ous types, including mis-selling of products,
failures with regard to rate benchmark set-
ting processes, to taxation and further is-
sues. The list of regulatory investigations and
litigation cases is long and has already been
costly for the banks concerned.
Incidences of detrimental business practices
have raised wide public attention. A related
increase of reputational risks has also been
identified by the respondents of the RAQ.
Growingly negative public perception of
banks has several undesirable affects, in-
cluding decreasing public willingness to sup-
port banks in distress, and may affect public
support for banks in potential future distress
situations, as recent discussions surround-
ing bank resolution indicated.
Supervisors and banks should therefore turn
their attention to increasing legal and repu-
tational risks with potential consequences
for affected banks beyond direct losses.
Potential shortcomings in institutions’ risk
management functions and compliance pro-
cedures need to be addressed, appropriate
contingency reserves should be made, and
disclosure on risks should be transparent.
Related risks should also be adequately re-
flected in the supervisory review process.
Business conduct of banks and
prudential risk
There are indications for an ongoing aggra-
vation of reputational risks. In the responses
to the RAQ, 76 % of respondents identified
an increase in the reputation/legal risk for
the banking sector in general and a negative
trend in banks’ public perceptions. This is an
increase compared to the December 2012
RAQ, and an indication that risks should be
carefully considered.
Business practices with a potential detri-
mental impact on the European banking sec-
tor can be related to mis-selling of unwanted
products, to fraudulent behaviour, and/or to
poor risk management. Some recent exam-
ples illustrate the issue.
The mis-selling of unwanted or unrequested
credit insurance (payment protection insur-
ance (PPI)) and other financial products made
it necessary for some banks to set aside sub-
stantial compensatory provisions that have
an impact on the profitability of these banks.
Financial market reference rates and respec-
tive calculation procedures have been under
closer public and regulatory scrutiny in re-
cent years. Since June 2012 three large Euro-
pean financial institutions have been found li-
able for attempted manipulation of Libor, and
Euribor by the UK and US authorities. Several
authorities around the world have investi-
gated cases of alleged misconduct regard-
ing the Libor rate-setting, Euribor and other
0 %
20 % 40 % 60 % 80 % 100 %
You see an increase in the reputation/legal risk for the
banking sector in general and also a negative trend in banks’
image with public opinion, media and the political spectrum
a. If yes:
i. You are aiming to adjust the culture and risk/conduct
governance within the organisation
ii. You are building contingency reserves
Jun 2013 — Agree
or somewhat agree
Dec 2012 — Agree
or somewhat agree
Figure 29: Trends in reputational risk (
source:
RAQ)
The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.