After almost four years of turmoil in the financial markets finally an inclusive reform of banking regulation is now arriving in Europe. There are many observers not only within but outside the market as well that believe that these new rules are coming at a perfect time as the industry is already facing another crisis. The regulation need to keep pace with the problems in the industry. However, right now it does seem like this might be a once-in-a-generation chance to put the industry on a regulatory foundation that is firm so that the industry could be restored and enabled to play its vital role in the financial system (Blundell-Wignall, 2011).

In these new regulations the capital-markets businesses come in to get the most crucial treatment. There are many universal banks that have focused their investments as well as their time on dealing with the effects that these new regulations have on the businesses (Blundell-Wignall and Atkinson, 2008).

Less attention has been received by the retail banking. Apparently the impact that the regulations have had on the retail banks seem to be moderate. Basel II and Basel III have dramatically increased the risk weightings for wholesale- banking products in some of the cases while in other cases the risk weights for the retail products are largely unaffected. The retail-banking capital needs are affected by the Basel III most of the times through the higher capital ratios that all the businesses have been affected with. Retail banking at first, even appears to be the recipient of the funding rules according to Basel III, the reason behind this is the fact that the retail deposits are of critical nature for the future funding of universal banks (Blundell-Wignall and Atkinson, 2010).

Looking a little closely, one can clearly see that the European retail banking will be challenged in a severe manner. Firstly, the impact that Basel III had on retail banking is less than the one that it had on the wholesale banking but it is not small nonetheless.

Secondly, there are numerous other regulatory initiatives that can be taken on the national as well as European level. Although, individually they might seem manageable however, the collective impact of these initiatives is very severe.

Thirdly, the ROE of the retail banking unlike the ROEs in capital-markets businesses starts from a base that is much lower therefore; the ROE might be pushed below the cost of equity with even very small impact from the regulatory reform.

Lastly, it is very difficult to mitigate the regulatory impact in the retail banking; the reason behind this is the fact that adjusting the business models in the retail banking takes a lot longer than it does in the capital-markets businesses where it is a lot easier to shift the trading desks and the positions (Blundell-Wignall and Atkinson, 2011).

It seems like the revenues, profits and margins will get substantially affected by Europe’s retail banks that now seem to be entering a period of regulatory reform. It also seems like this period will also change the time-honoured ways that these institutions conduct their businesses in. These effects have been estimated by a number of researches (Packer, Stever and Upper, 2007).

Furthermore, it is expected that the return of equity (ROE) for in Europe’s four largest markets’ retail banking will fall from 10 percent to 6 percent on an average, this shows a decline of 41 percent. This fall is going to result sue to the new national, global and regional regulations as well as the absence of any mitigating action taken by the banks or material changes in the competitive and economic market. This analysis is based on the data from the 2010 fiscal year; it is assumed here that the cumulative regulatory impact which is going to take place over the many upcoming years is realized immediately (Uslenghi, 2011).

Following are the drops in ROE that will be seen by the four markets given below (Uslenghi, 2011):

Italy, from 5 to 3 percent (40 percent)

France from 14 to 10 percent (a 29 percent decline)

The United Kingdom from 14 to 7 percent (48 percent)

Germany from 7 to 4 percent (47 percent) (Uslenghi, 2011).

There is going to be a further decline in the ROE in the retail-banking activities of the banks that meet the criteria of being global systemically important financial institutions (G-SIFIs). This decline in ROE is expected to be between 0.4 and 1.2 percentage points (EBA, 2012b).

Although the most important reason of these impacts is Basel III however, there are many other factors as well whose cumulative impact along with Basel III resulted in this decline in the ROE. Mortgages are especially a hard hit in the asset-based products. Debit cards and the investment products were the ones in the liability products that were hit the hardest especially in U.K (EBA, 2012b).

It is highly unlikely that in short to medium term the industry will be able to get to the point that it achieved before the regulatory reform. However, the individual banks might be able to rebuild the ROE to the level that it was at before these regulations took effect. This can be done by the banks by pulling all the four levels that are available to them (EBA, 2012a):

Approximately 30-360 basis points can be built by reducing the funding and capital wastage with the help of technical optimization.

ROE can be improved by 10-80 basis points with the help of capital and funding-light operating models.

Re-pricing in some selective areas might be possible.

The single most important lever is the realignment of substantial business model (EBA, 2012a).

In order to rebuild the ROE step by step the banks should make regulatory mitigation road map that could be embedded into a comprehensive strategic review (EBA, 2010).

All in all it can be clearly seen that the parts of Basel III through which the retail banking is affected are the ones that affect the whole banks such as; liquidity requirements and the capital payments. The retail banks will especially be affected by the capital ratios since in the recent years most of these have been operated by capital ratios that were lower as compared to the wholesale banks. Capital quality measures, such as the deduction of silent participations in Germany can affect the retail institutions. Even thought the liquidity requirements were lowered in the July 2010 Annex they will also be a factor (BCBS, 2010).

The new product-specific requirements of Basel III have an effect that is less relevant. After being amended in the July 2010 Annex the new funding requirements don’t really pose any specific challenge, the new market-risk framework doesn’t apply to the retail segment either (Del Punta, 2011).

An increase of up to 70 basis points will be seen in the short-term retail loans. An increase in the target ratios for the segments with long-term funding needs, relatively high risk weights and higher liquidity is the main reason behind this effect. In some cases the banks might be able to pass this effect onto the customers however; the repricing might be difficult in certain finance segments of the consumers (Del Punta, 2011).