A survey of bankers finds them most afraid of “regulatory overkill”, among all the risks facing their businesses.

Many senior bankers described regulation as “out of control”, reports a survey by the London, U.K.-based Centre for the Study of Financial Innovation and sponsored by PricewaterhouseCoopers. The report finds that regulatory overkill saps bank resources, reduces risk diversification and creates a false sense of security.

This finding is based on responses from 440 bankers and close observers of the banking scene in 54 countries, but the threat is perceived to be particularly strong in the EU and North America.

“Bankers have thrown down a challenge against too much prescriptive regulation,” said John Hitchins, UK Banking Leader, PricewaterhouseCoopers. “Many are worried that it is beginning to stifle innovation and judgment across the industry. While few challenge the objectives of regulators, there is a clear need for further debate on how these are implemented.”

Other high level risks include credit risk (2nd) and derivatives (4th), both of which featured prominently in last year’s survey. The other fast-rising risks identified in this year’s poll are hedge funds (5th) and electronic fraud (6th), as well as currency risk (7th) due to the current weakness of the US dollar. Closely linked to overregulation is the high place given in the rankings to corporate governance risk (3rd).

Unrest in the Middle East also gave a strong boost to commodities (up from 26th to 14th), where potential instability in the oil and gold markets is seen as threatening. However, broad concerns about macro-economic trends have eased (down from 3rd to 10th), along with fears of political shocks and terrorist attacks, as reflected in the sharp decline of concerns about business continuation (down from 5th to 19th). Worries about the strength of the insurance sector, which featured strongly last time, have also diminished (down from 4th to 11th).

The survey also found that banks were seen to be less well prepared to handle risk than before. 57% of respondents thought banks were moderately well prepared or better to handle the risks, down from 69% in the previous survey.

One reason for the perceived lack of preparedness was the inclusion in this survey of a larger proportion of respondents from emerging market and EU accession countries where bank readiness was seen to be less advanced than in industrial nations.

David Lascelles, the CSFI’s co-director who ran the survey, said, “It is ironic that people now see the greatest dangers in regulation when new types of risk are emerging all the time: hedge funds, derivatives, electronic fraud. Banks should not be distracted from these risks by box-ticking and form-filling.”