06 Aug 2008, Victoria Pennington, Operational Risk & Regulation
LONDON – Research prepared by London Economic and published by the City of London Corporation indicates tighter EU regulation could substantially reduce growth in the financial services industry.
This is the third edition of the annual report, The importance of EU wholesale financial services to the EU economy, prepared by London Economics for the City of London Corporation. The study – commissioned as part of the City Corporation’s ongoing research programme – predicts the credit crunch will cause 75,000 job losses across Europe, mostly in major investment banks. Other financial services sectors – such as insurance and commodities – should be more resilient.
The report identifies five key factors that will determine the performance of the financial services industry over the next five years: the regulatory environment; the state of the world economy; the evolution of domestic savings; competitive pressures 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, however, shows financial services gross value added (GVA) falling by 8.3% over 2007–2009. The industry is expected to recover in the medium term, though, with GVA in 2012 reaching 0.7% above 2007 levels.
Stuart Fraser, the City of London’s chairman of policy and resources, said the proposed amendment to the EU Capital Requirements Directive was a particular concern as the change would “greatly increase the cost of capital across Europe, with detrimental effects far beyond the financial services industry. Any new legislation should be developed according to the EU’s own principles of better regulation, including a reasonable consultation period and a full impact assessment – so far, we have seen neither”.
He added: “Sensible, principles-based regulation will help the EU to maintain its competitive edge as the world’s largest exporter of wholesale financial services. There is a lot at stake here. Not only do 1.4 million people work in the sector across the EU, but financial services are also a driving economic force, accounting for two-thirds of labour productivity growth in 2000–2007. Worse still, this regulation would drive the whole industry overseas, taking many jobs with it. ”
“There is probably a temptation to react by throwing a heavier rulebook at the problem; we must resist that urge because it will not only hamper the industry but confer a false sense of security from future shocks.“This report makes it clear that the financial services industry faces difficult times ahead. Some of the challenges – like the health of the world economy – are outside the control of EU governments. But Europe can act now to make sure financial regulation is part of the solution, not part of the problem.”
You can access copies of the report by clicking here