Mckinsey Report July 2012

Day of reckoning for European retail banking McKinsey report July 2012 The dynamics of the global banking sector have been in flux since the beginning of the 2008. Irate creditors everywhere have called for more stringent regulation to ensure that that the interests of financial institutions are more closely aligned with those of their customers and shareholders. The global, European and national authorities have responded with vigour and the regulatory reform to which all banks, wholesale and retail, will be subject in the coming years will have an important impact on their bottom line. The single biggest cause of a reduction in retail banks’ ROE will come from the global regulatory mechanism Basel III, which will place greater capital requirements on banks and more emphasis on adequate funding and liquidity. Furthermore, three important European regulatory instruments, the EU Mortgage Directive, the Markets in Financial Instruments Directive (MiFID II) and the Single Euro Payments Area (SEPA), Payment Service Directive, will also considerably diminish ROE. Finally, the implementation of new national regulation will create further downward pressure on ROE, though this will vary considerably from country to country. This report provides estimates on the impact on capital, revenues, costs and profit margins of all the relevant regulations on each product (both asset- and liability-based) in each of the four biggest European markets – France, Germany, Britain and Italy – which combined constitute 66% of the EU27 retail-banking market. ROE is the standard metric used and the report calculates the cumulative effect of all regulation as if it were all put in place immediately, using 2010 as the baseline year. The paper reaches some important conclusions. Firstly, with regard to national and continent-wide retail banking markets, ROE will fall from approximately 10% to 6% when all four markets are taken as a whole. Below is a breakdown of the effect in each of the