The EU's financial sector is expected to have shrunk by 6.2% in 2009, a European Commission report has found, on top of a 0.3% fall the year before. The figure is even greater than the drop in economic activity since the start of the financial crisis, which saw GDP contract by around 4% last year - according to Commission estimates - after a 0.8% decline in 2008.

The Commission's yearly European financial integration report said that profits have also been hit hard by the crisis, with the average return on earnings down to 4.5% in 2008 from 19% in 2006. Profits were dragged down by high losses in Belgium, the Netherlands, Germany and the UK, while newer member states, such as Bulgaria and Romania, fared better.

The large banks were hardest hit, which could be linked with their exposure to the US subprime market - although large EU banks experienced higher losses than their American counterparts. In terms of efficiency, the relative unwillingness of EU banks to lay off staff may have cost them more than US banks, which posted a lower cost-to-income ratio.

The profitability of the European insurance sector "radically deteriorated," the report said, with returns averaging 3.9% of earnings in the life sector and 5.3% in the non-life sector in 2008 (down from 14.4% and 16.6%, respectively, in 2007).

Stock markets also took a tumble, with European investors losing almost 5.2 trillion, which is worth about 40% of the EU's GDP.

But it is not all bad news, says the report, which predicts the crisis will force banks to step up efficiency. "Over the medium term, the pressure linked with difficult...

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