Canadian banking executives rank a deteriorating credit environment as their top concern for 2010, suggests a new report, even as their global banking counterparts have identified political interference from governments as outstripping all other risks.

“Relatively speaking, Canadian bankers are a little less concerned about political interference than global bankers,” says George Sheen, national leader of the financial services practice at Toronto-based PricewaterhouseCoopers LLP.

The report, released in Feb-ruary by the Britain-based Centre for the Study of Financial Innovation in association with PricewaterhouseCoopers, ranked what global bankers said was their top 30 greatest concerns for 2010.

The CSFI surveyed 443 bankers, banking regulators and industry observers across 49 countries for the Banking Banana Skins 2010 survey. The views of 16 Canadian banking insiders, 14 executives and two observers were included in the survey.

Canadian bankers and their global counterparts, who ranked credit risk as their second-highest worry, both remain concerned about weakness in the global economy, steadying but still high unemployment levels and the threat of rising interest rates and inflation. All those worries are reflected in the high rates of loan-loss provisions that global banks have been regularly announcing in their quarterly reports.

Although Canadian executives said political interference is their fourth-highest worry — after credit risk, risk-management quality and macroeconomic trends — global bankers felt that interference by governments posed the greatest risk to their business.

“Global bankers,” Sheen says, “are worried that politicians will step in more proactively to influence some of the regulatory changes [being discussed] in the marketplace.”

What’s notable is that this is the first year in the survey’s 16-year history that political interference had even made the list of the top 30 concerns. It’s a reaction, the survey’s authors suggest, to the fact that while bank bailouts around the globe had prevented a collapse of the system, they also ushered in a troubling politicization for the industry.

“As a risk, political interference has many angles,” the report says. “It distorts commercial judgment, it creates moral hazard and it raises uncertainty about when financial support will be removed.”

Linked closely to the worries over political interference is the concern over too much or ill-conceived regulation, which global bankers worry might hamper recovery in the industry and result in unforeseen, negative consequences.

“When governments moved in with bailouts, one could say they brought stability to the global industry,” says Diane Kazarian, national leader of the banking and capital markets practice at PricewaterhouseCoopers in Toronto. “And by doing so, decreased liquidity risk, derivatives risk and other risks that have traditionally ranked higher in previous years’ surveys. But, as a result of that, [governments] have precipitated regulatory uncertainty.”

That Canadian bankers identified political interference and overregulation as lesser concerns compared with their global peers is probably a result of the fact that Canadian banks did not have to be rescued by governments during the recent financial crisis, Sheen suggests, and because the regulatory regime governing banks in Canada appears to have created a domestic banking industry that is more resilient to crises, relative to other jurisdictions. Nevertheless, he adds, any regulatory changes affecting banks, agreed to on an international level, will affect Canadian banks.

Canadian bank executives diverged from their global counterparts in how they view a number of other concerns on the horizon, the survey suggests.

One of the most striking divergences was in capital availability. Global bankers ranked it as their sixth-greatest perceived risk, whereas Canadian bankers ranked it 24th.

“Each of the Canadian banks actively went to the marketplace to shore up capital last year,” Sheen says, “and were able to do so with relatively little trouble.”

Canadian bankers ranked risk-management quality as their No. 2 worry; global bankers ranked it as No. 8.

This is a curious result, considering that Canadian banks seem to have run into less trouble during the recent crisis than their global peers in terms of getting involved with risky or ill-considered practices.

“I think, regardless of how financially strong any firm is, it probably had some surprises [during the crisis] in its reporting, internal risk-management processes, etc.,” Sheen says. “Every firm is using this as an opportunity to say to themselves: ‘What were the lessons, how can we do better in the future?’”

Canadian bankers ranked management incentives, or compensation, as the eighth-highest perceived risk to the industry; global bankers ranked it 16th.

@page_break@This result is noteworthy, Sheen says, because the perception is that the push to rein in compensation — both from the public and politicians — seems to be greater in the U.S. or Britain than in Canada.

“Perhaps the Canadian banks worry a little bit more, relatively speaking, from an image standpoint about making sure they get management incentives ‘right’,” Sheen says. “That being said, I’m not so much surprised that it’s the No. 8 concern in Canada as I’m surprised that it’s No. 16 elsewhere.”

But Canadian bankers don’t have to lose sleep over the public’s perception of banks, according to a related PricewaterhouseCoopers survey, released in February as part of the firm’s Canadian Banks 2010 annual report. That survey found that 80% of Canadians have confidence in domestic banks and 72% said Canadian banks are well run. IE