The new report outlines potential adaptation scenarios for the European financial sector in the aftermath of the financial crisis.
The global debate on new regulatory rules for the financial sector in the aftermath of the current economic crisis is producing a flood of arguments, suggestions and proposals. Different restructuring and adaptation approaches are competing and it remains unclear which one will be the future for European financial services.
New research launched by Eurofound's European Monitoring Centre on Change (EMCC) shows that the financial services sector is dominated by companies that have re-focused on their core business in an effort to return to profitability, albeit at the expense of considerable job cuts. In 2009, roughly 10% of jobs in the state-owned banks examined were cut, compared to around 5% in the surveyed private banks following a liberal business model. One part of the European financial sector is in state ownership, and some institutions will remain under this control for a longer period of time, the report found. A second part of the sector, which is building up a sustainable business model, performed with minor job losses. A third group continues to deal in liberal capital markets with a strong profit orientation.
The report examines a number of company cases and classifies Europe's leading banks and financial institutions according to their new business models and approach: the profit-oriented ‘liberal bank' pressing for minor regulatory change; the ‘state-owned bank' which undergo massive reorientation of business strategies and restructuring under public scrutiny; and the ‘sustainable bank' with its stronger customer orientation, less leverage and less ambitious profit targets.
The report suggests three potential adaptation scenarios for the European financial sector. The ‘high risk status quo scenario' assumes that the big players are strong enough to ensure that no major reform of the financial system takes place, and allows the high-risk/high-profit trading activities of the past to continue. The ‘new world order for financial markets' scenario sees the G20 governments agreeing a fundamental reform of the world financial system in December 2010. Implementing these rules will terminate the ‘golden age' of financial business and improve the chances of creating sustainable business models for companies in the financial services sector, benefiting customers, people working in the sector, and the market as a whole. The ‘divided economies' is the worst case scenario, in which the international regulation of financial markets fail, resulting in rising default rates and overburdened public budgets, forcing some governments in the euro zone to large-scale liability cut and the liquidation of a series of banks. All scenarios are expected to cause further job reductions, albeit at different levels.
Eurofound's report on the challenges and prospects on the European financial services sector will be presented to the European Parliament on Wednesday 13 October 2010.
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