New bank regulation threatens jobs and growth in Europe

The Institute of International Finance (IIF)* published today its preliminary study on the impact of the new regulatory requirements for banks. According to the study, the cost of lending to both households and businesses would increase significantly in the euro area, were the proposed regulatory package implemented.

Concretely, this means that annual credit growth would be only 2% over the decade, as opposed to the earlier estimate of 3.3%. This would amount to losing about 4% of cumulative GDP growth over ten years. The IIF also predicts that the slowing growth would affect employment creation by almost 5 million jobs in the euro area.

Piia-Noora Kauppi, Managing Director of the Federation, says the profitability of banks and the return on equity will likewise be affected by the changes. It will also become more difficult to raise new capital.

"The proposed regulatory changes will fall particularly hard on our financial sector due to the low risk level of Finnish retail banks. It seems unreasonable especially because the Finnish financial services industry has had no role in causing the crisis, and its operations have constantly been on firm ground," Kauppi states.

"There is ongoing discussion to introduce a financial stability contribution and a financial tax for banks, in addition to the changes planned to the deposit guarantee scheme. If these are taken into account, the results may be even worse than the IIF has estimated."

The IIF also fails to include the effects of the leverage ratio in the report. These effects would be particularly harmful for Finnish and other Scandinavian retail banks, who grant house loans for a volume far greater than banks elsewhere in Europe.

The study further notes that banks in the euro area would be more drastically affected by the proposed changes to banking regulation than in the US, because bank lending plays a leading part in the economy in the euro area. As much as 75% of private sector credit is held in banks' balance sheets in the euro area. In the US the proportion is 25%.

The euro area banking system is the largest in the world, with on-balance sheet assets totalling €31.1 trillion at the end of 2009.

IIF's report ‘Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulation Framework' is available on the Federation's website at www.fkl.fi linked to this press release.

EBF Press Release

*The Institute of International Finance (IIF) is a global association, whose members include the world's largest financial businesses and organisations representing the industry.

For further information contact
Piia-Noora Kauppi, Managing Director at +358 20 793 4210

Federation of Finnish Financial Services represents banks, insurers, finance houses, securities dealers, fund management companies and financial employers operating in Finland. Its membership includes employee pension, motor liability and workers compensation insurers, all three providers of statutory insurance lines that account for much of Finnish social security. The Federation has about 480 members who employ a total of 43,000 people.