Banking industry concerns over the current market turmoil, notably the liquidity shortage and the crunch in the credit and derivative markets is leading to the fear that these strains will lead to a global recession, according to a recent survey.

The survey was conducted by London, England-based think tank The Centre for the Study of Financial Innovation (CSFI) in association with PricewaterhouseCoopers (PwC).

The survey shows the top three risk concerns for Canadian banks are derivatives, credit spreads and liquidity issues. However, only 22% of Canadian respondents and 24% globally felt they were well prepared to manage those risks.

The poll is based on the views of nearly 300 senior figures from the financial world in 38 countries, including Canada, and ranks 30 risks according to their severity. While generally inline with the global findings, the Canadian results show a change in top concerns from 2006, where banks cited commodities and too much regulation among their top three main concerns.

“This year, two of the top three risks — liquidity and credit spreads — have never previously appeared in the rankings, an indication of how dramatically the risk scene has changed,” says Diana Chant, leader of the financial services practice at PwC. “The survey shows that the crisis has exposed a failure of controls within banks due to many factors including the growing complexity of finance, distorted incentive structures and insufficient regard to risk management.”

The most striking declining risk for Canada was over-regulation, which was in the number three spot in the poll last year but fell to 8th place this year. But regulation is still seen as a major risk, particularly if there is a “knee jerk” reaction to the crisis. Canadian respondents also showed a concern with rising criminality, particularly fraud which moved from 19th in 2006 to 7th this year.

Another growing concern among Canadian respondents was the back office and its reliability and efficiency. This year the back office ranked 14th versus 30 in 2006. Globally this year the back office ranked 19th. Chant notes, “Getting your own house in order is critical to managing in times of market downturns and will help ensure sure you get through them.”