European Banks & The Regulatory squeeze


This month McKinsey Quarterly published a standout paper on the regulatory squeeze of the European banks with the concluding remarks that the new rules will lower returns, but banks may be able to regain some lost ground.

The analysis was based on the 2010 financial-year data, assumes that the cumulative regulatory impact expected over the next several years will be realized immediately. The Basel III and new regional and national regulations will help reduce retail banking’s average return on equity (ROE) in Europe’s four largest markets to 6 percent, from about 10—a 41 percent decline.

Interesting to see that fall on ROE in four markets :-

France from 14% to10% ( 29% decline)
Germany from 7% to 4% ( 47% decline)
Italy from 5% to 3% ( 40% decline)
– The UK from 14% to 7% (48% decline)

There are several regulatory reasons described in the report here are some of them –

  • The retail banking activities of banks that qualify as global systemically important financial institutions will be subject to further ROE decline of between 0.4 and 1.2 percentage points.
  • While Basel III is the single most important source of these effects, its is the cumulative impact of many regulatory initiatives that drives the decline in ROE.
  • Among asset based products, mortgages are particularly hard hit. Among liability products, investment products and debit card are hit hardest.

There are very less chances that the industry will come back to returns it achieved prior to regulatory reform. But the individual banks can rebuild ROE to pregulations levels by pulling all 4 levers that is available.
– Reduction of capital and funding wastage through technical optimization
– Capital and funding light operating models can improve ROE by 10 to 80 basis point.
– Some selective repricing may be possible
– Substantial business model realignment is the single most important Lever.


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