1 August 2008
City of London report shows that new EU regulation could reduce
financial services growth
New research published by the City of London shows that tighter
EU regulation could significantly reduce growth in the financial
services industry. This is the third edition of the annual report
on “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 that 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 which 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. Four scenarios for
the evolution of the financial services industry to 2012 are
presented below. Each scenario assumes a different combination of
positive and negative influences from the key factors (see pages
80-95 of the report).
In the most likely scenario, financial services gross value
added (GVA) falls 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.
The Benign scenario (1)
Probability it happens: 20%
World growth: As predicted by IMF
Regulation: Minor changes, such as remuneration guidelines and
tighter supervision.
Competitiveness: No loss of competitiveness, exports continue to
grow
% change GVA* 2007 – 2009: - 4.8%
% change GVA* 2009 – 2012: + 13.7%
The Challenging scenario (2)
Probability it happens: 40%
World growth: as predicted by IMF
Regulation: Tightening: Increase in capital holding requirement;
limited scope of activity
Competitiveness: Falling competitiveness and exports
% change GVA* 2007 – 2009: - 8.3%
% change GVA* 2009 – 2012: + 8.4%
The Stressful scenario (3)
Probability it happens: 25%
World growth: ½ percent lower than IMF predictions
Regulation: Tightening: Increase in capital holding requirement;
limited scope of activity
Competitiveness: Falling competitiveness and exports
% change GVA* 2007 – 2009: - 11.2%
% change GVA* 2009 – 2012: - 2.9%
The Positive Surprises scenario (4)
Probability it happens: 15%
World growth: ½ percent higher than IMF predictions
Regulation: Limited changes with no impact on the sector
Competitiveness: No loss of competitiveness, exports continue to
grow
% change GVA* 2007 – 2009: - 2.6%
% change GVA* 2009 – 2012: + 15.9%
Based on pages 80-97
* GVA of wholesale financial services industry for EU27,
calculations is €bn at 2007 prices
Stuart Fraser, the City of London’s Chairman of Policy and
Resources, said:
“This report makes 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 that financial regulation is part
of the solution, not part of the problem.”
“We are particularly concerned about the proposed amendment to
the EU Capital Requirements Directive. This 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.”
“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 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
rule-book 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.”
London’s strength makes UK more sensitive to financial shocks
than other Member States
The findings also show that the UK’s strength in financial
services makes it more sensitive to both positive and negative
shocks. In the worst-case scenario, the UK’s financial services
industry is hit harder than other major EU financial centres, with
GVA in 2012 19% below 2007 levels in London compared to -14.3% for
other major EU centres. However, London also stands to gain the
most from a recovery: in the best-case scenario, London’s financial
services sector would enjoy a rebound to 17.8% above 2007 levels in
2012, compared to 13.4% for other major EU financial sectors (see
table 29, page 97).
Ends
Notes for editors
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Download Wholesale Financial 08 report
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The City of London Corporation provides local government
services for the Square Mile, the financial and commercial heart of
the UK, and is committed to maintaining and enhancing the status of
the business City as the world's leading international financial
and business centre through its policies and services. Its
responsibilities also extend far beyond the City boundaries and
include management of the Barbican Centre, Central Criminal Court
at the Old Bailey, 10,000 acres of open space including Hampstead
Heath and Epping Forest, three wholesale food markets, as well as
acting as the London Port Health Authority.
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Stuart Fraser is Chairman of the Policy and Resources Committee
of the City of London Corporation.
Read his biography.
Press contact
For more information: Laura Citron in the City of London press
office, 020 7332 1835 or 07784 295 736 or
laura.citron@cityoflondon.gov.uk.