Industry Surveys

Under A Strength And Sustainability Test, World's Top Banks Mostly Fall Short - Sarasin

Tom Burroughes , Group Editor, London, 14 December 2011

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Banks have made relatively slow progress in making their business models more sustainable in terms of financial resilience, risk and in how their activities affect the environment and society, says Sarasin in a new report.

The world’s leading banks – including those with wealth management operations – are still a “long way” from creating rugged businesses able to withstand shocks, Swiss private bank Sarasin said in a report yesterday.

When measured for “sustainability” – a broad term covering issues ranging from financial resilience through to how investments affect society and the environment – large banks have made little headway since the financial crisis started three years ago, Sarasin said.

“The banking system is highly regulated. Yet despite all the rules imposed from outside, extensive internal regulations and control mechanisms, flagrant violations come to light all the time,” the report said.

On a chart showing sustainability of the banking sector on the horizontal axis and sustainability of the company on the vertical one, Sarasin's report noted that most banks are clustered in the middle, with few outstanding candidates and few outright duds. Canadian and Nordic banks such as Toronto-Dominion, Nordea and Royal Bank of Canada enjoyed the highest chart ratings, while US banking giants JP Morgan and Bank of America came towards the bottom side of the chart grid. Credit Suisse, Barclays, UniCredit, UBS and Morgan Stanley also fared relatively low in the chart rankings.

"Within this broad midfield," Sarasin said of the cluster of banks, "none of the banks have so far made a fundamental break towards more sustainable business models."

“From a sustainability perspective, the critical issues for the banking industry include systemic relevance and stability, the integration of sustainability criteria into the core business and compliance,” the report said.

The report, entitled Credit all used up – Time for a sustainable dawn?, the report focuses, as a benchmark of sustainability, the oft-cited “too big to fail” problem of large banks and risks they can pose to an entire economy. It noted that assets held on balance sheets of the three largest UK banks, as a percentage of national gross domestic product, rose from 7 per cent at the start of the twentieth century to 75 per cent at the end of it, soaring to 200 per cent in the period up to 2007.

However, tax-funded bailouts on both sides of the Atlantic have led to an arguably even more concentrated banking system and the “too big to fail” issue remains glaringly evident, the report said. Total assets held on balance sheets of the world’s 25 largest banks rose seven-fold between 1990 and 2009. Three years after the collapse of Lehman Brothers, the top six institutions in the US are even bigger than before the crisis.

The Sarasin report also examined what it called “system-relevant” banks – looking at the relationship between a firm’s total assets and the GDP of the country where the bank is domiciled. For example, at UBS, the Swiss bank’s asset/GDP ratio is 266 per cent, while Netherlands-based ING’s ratio is 261 per cent, and Denmark’s Danske Bank ratio is 232 per cent; Credit Suisse’s is 208 per cent; HSBC’s is 187 per cent; Banco Santander’s is 181 per cent; BNP Paribas’s ratio is 123 per cent and Barclays’s ratio is 113 per cent.

Despite some concerns, Sarasin noted that banks have had to increase their “buffer” capital to comply with new Basel regulatory standards; it also pointed out that strict law enforcement appears to have significantly reduced problems such as money laundering.

Turning to environmental concerns, Sarasin said it was unimpressed by performance, stating that among the 30 large banks covered in the MSCI World Index of equities, loans for environmental technology and renewable energy accounted for less than one per cent of the credit total.

 

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