Financial services: Challenges and prospects

Summary:
The European Foundation for the Improvement of Working and Living Conditions (EUROFOUND) commissioned this study on financial services in the post-crisis period. The report reviews recent 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 as a response to the crisis, and it develops scenarios for the potential adaptation process of the European financial services sector. The research was conducted by means of company-based case studies, an online survey and interviews with experts from companies, social partners, research institutions and public authorities.

The study concludes that important adaptations have already taken place in European financial services: significant deleveraging, a ‘back to the core business’ restructuring, and the change of remuneration systems with a stronger emphasis on long-term incentives. Important challenges are nevertheless ahead: the naissance of a new regulatory framework for financial markets, the vulnerability of the economies to a second or third backslash of the crisis, and the new strength of Asian players.

Three scenarios have been developed for the next five to ten years:

• The past is the future – a high-risk status quo scenario:
  A fundamental restructuring of the financial services is prevented by the big players. The industry continues with short-term profit strategies with a strong shareholder-orientation.

• A new world order for financial markets – the end of the golden age:
  The effective regulation of financial market contributes to reorient the business towards sustainable business models an dries up high-risk financial markets.

• Divided economies – a worst case scenario:
  No consensus will be achieved on a new financial world order and the financial and economic crisis will run out of control. Destabilisation will divide Europe both economically and socially.