Much financial regulation has recently been adopted, going from the Belgian banking law to the European capital requirements. PwC research suggests that the level of post-crisis banking regulation today carries a structural cost to the Belgian economy of 0,74% of GDP growth and 25,000 fewer jobs but in return should lead to more financial stability. The same research however shows that further and more stringent banking regulation could cost up to 1.5% of GDP growth to the Belgian economy as well as the loss of 81,000 jobs across the next 30 years.
Role of the banking sector in the Belgian economy
The Belgian banking sector performs a critical role in financial intermediation, by facilitating the flow of credit between lenders and borrowers, providing maturity and risk transformation, and handling payment systems. Banks also help businesses manage their risks and investments, raise capital, and facilitate efficient flows of domestic and international capital. The banking sector in Belgium generated €14.2 billion of gross value added (GVA) in 2013, which is around 4.3% of Belgian national GVA, and provides employment for around 66,000 people.
However, despite this contribution, the 2007 financial crisis clearly illustrated the risks associated with the sector. Regulatory reform remains at the top of the financial sector policy agenda, with the primary objective to ensure that the costs of excessive risk-taking are borne by banks and investors rather than taxpayers and businesses and to preserve the stability of the financial system.
Economic impact of banking regulations under two scenarios
A new PwC report, “Where next? The impact of banking regulations in Belgium”, launched today, examines the economic impact of these regulations. In order to gain a sense of the magnitude of the economic impact of banking regulations, PwC economists have developed two scenarios that differ in regulatory severity and impact, with Scenario 1 specifying a set of current regulations as adopted today and with a more stringent Scenario 2.
|Scenario 1: post-crisis current banking regulations as adopted today||Scenario 2: more stringent banking regulations compared to current regulations|
|0.7% reduction Belgian GDP||1.5% reduction Belgian GDP|
|25,000 fewer jobs across the economy||81,000 fewer jobs across the economy|
Scenario 1 : current regulations as adopted today; this scenario 1 combines the impact of CRD IV (Capital Requirements Directive), bank resolution mechanisms such as the RRD (Recovery and Resolution Directive) and SRM (Single Resolution Mechanism), structural banking reforms and banking taxes, and reflects the current regulatory landscape.
Impact under scenario 1: post-crisis banking regulations as adopted today, aimed at reducing the likelihood and cost of future crises, could lead to a reduction in the level of Belgian GDP of 0.7%, which is equivalent to €2.8 billion per annum, and to 25,000 fewer jobs across the economy in the coming 30 years.
Scenario 2: more stringent regulations compared to current regulations; this scenario combines the impact of the regulations considered in Scenario 1 but with more severe regulatory requirements, and also includes the FTT (Financial Transaction Tax) and the continuation of the financial stability contribution.
Impact under scenario 2: more stringent regulations compared to current regulations could lead to a reduction in the level of Belgian GDP of 1.5%, which is equivalent to €5.7 billion per annum, and to 81,000 fewer jobs across the economy in the coming 30 years.
The regulations include new banking rules and supervisory mechanisms, which aim to improve bank capitalisation and their resilience to shocks, as well as crisis management and resolution arrangements for global systemically-important institutions. At the national level, Belgian policymakers have also implemented various bank taxes and proposed capital surcharges on banks’ trading activities.
The study was initiated by Febelfin, which called upon PwC for the necessary macroeconomic analysis and banking sector expertise. This study attempts to quantify the combined economic impact of banking regulations over a 30-year time horizon. PwC economists used a bespoke dynamic economic model that was developed in the UK and tailored to the Belgian economy, to carry out the analysis.
Roland Jeanquart, Partner, Financial Services, PwC Belgium, commented: “While the sector has contributed significantly to investment and job creation throughout the country, the financial crisis brought to light practices in banks and providers of financial services that have highlighted the need for better regulation. The challenge for regulations that limit the likelihood and impact of any future crises is to allow both the banking sector and the wider economy to prosper. Our analysis suggests that the banking sector has deep linkages with other sectors in the Belgian economy. This highlights the profound effect that financial services regulation or changes in financial services performance can have on non-financial services businesses.”
The report emphasises the need to carefully weigh the benefits of introducing further regulation on the sector against its costs, taking into account the importance to Belgium of a competitive banking system capable of supporting essential intermediation services for the real economy.
Impacts of regulations under Scenarios 1 and 2 on employment, steady state impact:
Notes to editors: