The recent financial crisis has brought to light the serious challenges that the European financial services sector is facing. What are the prospects that a viable, more resilient financial industry will emerge from the crisis? This report reviews the economic trends in the banking and insurance industries and the debate on the regulation of financial markets. It looks in detail at the business models that are applied in the different segments of the financial sector as a response to the crisis. Finally, it develops scenarios for the potential adaptation process of the European financial services sector. The research was conducted by means of case studies of a range of companies in the sector, an online survey and interviews with experts from companies, social partners, research institutions and public authorities and a detailed analysis of company statements and financial data.
Throughout 2009 and 2010 the health of the financial system has improved. With the global economy growing, risks to financial stability have diminished. The capital ratio of the Euro area’s banking system rose by one percentage point from autumn 2008 to 7.5% in December 2009, the highest level ever recorded. Continued deleveraging in the banking sector (paying off of debts) has helped to reduce the predisposition to shocks, so normalising markets. With the rise in asset prices, large parts of the banking sector have returned to profitability.
No clear trend of company restructuring in European banking services is visible. Much depends on new regulation, which is still being formulated. Some changes can, however, be discerned. Firstly, trading books will not regain their pre-crisis importance. This can be attributed to the significant reduction of proprietary trading, which was associated with a strong decline in jobs for traders. Secondly, deglobalisation of markets may happen to some degree as national markets become more important. Foreign activities do not always fit the prevailing business model and appear to be risky. Finally, national governments have supported many banks directly or indirectly. This is going to create a strong commitment to the country of residence and may lead to a retreat from international investment banking and trading. [taken from press release]
The full report can be downloaded from the Eurofound website