Leaders in the Canadian financial services sector says commodity risks are their biggest worry, citing energy and raw material prices as main concerns. And on a global scale, regulatory burdens are identified as the greatest concern, according to the latest Banking Banana Skins survey of banking risks.

Surprisingly, Canadian respondents ranked environmental risk significantly higher than other industrialized countries. Otherwise, Canadian rankings reflected similar concerns among industrialized countries about the complexities of regulation, and market risks such as derivatives and credit.

As they did in 2005, survey respondents from around the globe said that too much regulation was endangering the financial health of banks with its costs, diversion of management time and the sheer volume of regulatory initiatives. But this year, many of them added their concern about the politicization of regulation and interference by governments seeking to influence banks’ behaviour.

“The challenge for Canadian banks is to use compliance information to create a competitive advantage and integrate compliance with risk management and governance to be cost effective,” said Diana Chant, leader of the Financial Services Practice at PricewaterhouseCoopers LLP in Canada.

This year’s survey coincides with a period of heightened volatility in the financial markets, which is reflected in the Banana Skins index, a newly compiled measure of market anxiety based on the nine years of global survey results. This year, the index shows a sharp uptick, bringing it close to its record high in the wake of the dot-com market crash in 2000-2002.

Top of the sharp risers in the new Banana Skins index are commodity markets (up from 14th place to 4th) on the back of energy concerns and volatile raw material prices. Concerns about countries such as China and India also pushed emerging markets up the list, from 15th place to 9th. Among other market risks, equities and interest rates gained several places.

Concerns about credit risk, derivatives and hedge funds also featured high in the table. The feeling is widespread that financial markets have had it too good for too long, and are ceasing to apply the same rigorous standards as before. The ready availability of credit, abundant liquidity and growing capacity in the sector are driving down margins and forcing banks to take ever-greater risks to protect their revenues.

Another area of rising concern is the banks’ growing dependence on technology for the safety and soundness of their business. With the growing sophistication of hackers and the vulnerability of distributed systems to attack, there are questions about the ability of banks to manage their increasingly hi-tech operations.

But against that, some previously high-ranking risks have eased. In the area of financial crime, both fraud and money laundering fell several places, mainly because of the number of initiatives now in place to deal with these issues.

Globally, banks are also seen to be better placed to handle shocks in the system. This year, 64% of respondents thought institutions were moderately well prepared or better able to handle the risks, up from 57% last year. Confidence was particularly strong among bankers (73%), but also among regulators (63%), up sharply from 39% last time. Outsiders were more sceptical: only 44% thought banks were well prepared.

The Banking Banana Skins survey is compiled by the Centre for the Study of Financial Innovation in association with PricewaterhouseCoopers LLP. The survey was conducted in April and May 2006, and is based on 468 responses from 60 countries.