European economic growth: the role of financial sector regulation

As current Chair of the European Financial Services Roundtable (EFR), Swiss Re was a key contributor to the EFR's new publication How regulation can preserve the contribution of financial firms to economic growth in Europe. The publication will support constructive discussions between governments, regulators and the financial sector as they work towards bolstering growth across Europe.

Five years into the financial crisis there is an urgent need to return to growth across Europe. While differences of opinion exist about the best path to economic recovery and the specific policy measures required, all agree that growth is required to lessen the pressure of the sovereign debt crisis and safeguard the long-term welfare of European populations.

Following the release of the report, Swiss Re Chairman Walter B. Kielholz said in his capacity as EFR Chairman: "Regulation must strike a balance between keeping the system safe and encouraging the financial sector to take economically necessary risks."

While financial sector regulation can promote long-term economic growth, overly cautious regulation can restrict the supply of credit to the real economy and ultimately hinder financial firms from fulfilling their vital role. For citizens and businesses, this means that regulators and policymakers must ensure that European financial firms continue to provide competitive products and services that are vital to citizens and businesses. Furthermore, new regulation must not create uneven playing fields where “regulatory arbitrage” sees capital flow to where the rules are favourable instead of where it will be put to best economical use. Given the globalised financial industry, this must be considered across jurisdictions.

More specifically, the publication calls for regulatory reform that:

  • Makes banks and financial firms independent of taxpayer support, thereby eliminating distortions in risk pricing and moral hazard
  • Ensures a coordinated approach and level playing field across countries and sectors – most importantly, across banking and insurance
  • Encourages new funding models and improves the financing of long-term projects, including infrastructure and low-carbon technology
  • Explicitly trades off systemic safety and economic growth
  • Provides clarity in the reform process as uncertainty stifles the ability of banks and insurers to investment in the real economy

Swiss Re is a member of the EFR, whose membership represents many of Europe’s major financial institutions. The report is available for download (PDF,334 KB) from EFR.

Published 28 November 2012

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