Regulation hinders EU's finance industry

LONDON - More research condemning EU regulation has been published by the City of London Corporation. The latest report, prepared by consultancy firm London Economic, indicates tighter EU regulation could greatly reduce growth in the financial services industry and push business overseas.

This is the third edition of the annual report, The importance of EU wholesale financial services to the EU economy. The study predicts the credit crunch will cause 75,000 job losses across Europe, mostly in large investment banks. However, other financial services sectors - such as insurance and commodities - are expected to be more resilient.

The report identifies five factors that will determine the financial services industry's performance over the next five years: the regulatory environment; the state of the world economy; the evolution of domestic savings; competitive pressure from outside the EU; and changing business models.

The study presents several scenarios for the evolution of the financial services industry to 2012, each assuming a different combination of positive and negative influences from the key factors. The most likely scenario shows financial services gross value added (GVA) falling by 8.3% over 2007-09. The industry is expected to recover in the medium term, with GVA in 2012 reaching 0.7% above 2007 levels.

Tighter EU regulation, the Capital Requirements Directive (CRD) in particular, is credited as a major contributer to the fall. Stuart Fraser, chairman of the policy and resources committee at the City of London Corporation, says: "The proposed amendment to the CRD is the last thing markets need. It will make capital more expensive and less available just as we head for a downturn. Crisis-driven regulation is not the way to go - we need a stable, consistent, principles-based regulatory framework. Investors have learned their lesson with collateralised debt obligations - the market for non-transparent products will dry up without regulation. Even if the European Commission wants to act against complex debt products, this proposal - to regulate all credit risk transfer products - is surely over the top. Most importantly, Commissioner Charlie McCreevy's plan would throw the baby out with the bathwater, driving Europe's securitisation industry back to the US."

Any new legislation, according to Fraser, should be developed according to the EU's own principles of better regulation, including a reasonable consultation period and a full impact assessment. He says this has yet to be seen.

"Sensible, principles-based regulation will help the EU maintain its competitive edge as the world's largest exporter of wholesale financial services," he says.