The lights of Frankfurt’s bank skyline shone in the final light.
Boris Roesler | Picture Alliance | Getty Images
As Wall Street awaits a new era of financial deregulation under President Donald Trump’s second term, European banks face a tougher task of closing the profit gap with their U.S. rivals.
Eurozone and British banks have been struggling since the 2008-09 global financial crisis due to poor profitability and economic weakness, while U.S. banks have soared in value and grabbed market share, especially investment banks as European rivals retreated field.
Some banks have begun to regain lost ground this year. Until this week, European stocks had outperformed their U.S. peers, amid growing hopes that the U.S. would adopt elements of Basel III regulations to help level the playing field by requiring U.S. banks to hold more capital.
Trump’s victory in the presidential election this week turned the tide. JPMorgan Chase, Goldman Sachs and Morgan Stanley Stocks all surged, while the STOXX Europe 600 Bank Index fell more than 1% for the week.
“The expectations are simple: deregulation and tax cuts in the United States contrast sharply with tight regulations and low interest rates in Europe,” said David Materazzi, CEO of Italian automated trading platform Galileo FX.
“If U.S. banks receive the expected policy support, they may be able to increase loan sizes and optimize capital in a way that European banks are currently unable to match,” Materazzi said.
European bank stocks have fallen 10% since the start of 2010, while U.S. bank stocks have more than tripled.
The ECB estimates that return on equity for euro zone banks fluctuates around 5%, compared with 10% in the United States, linked to higher fee income in the United States and legacy nonperforming loans that European banks are still dealing with.
Lobbying leverage?
There are already signs that European politicians are preparing for a new situation under Trump.
Swiss Finance Minister Karin Keller-Sutter said on Thursday that she and British Finance Minister Rachel Reeves discussed the prospects for U.S. banking regulation.
“There was talk before that the United States was about to see a wave of deregulation,” she told Reuters, adding that both sides believed it was important to strike a balance between competitiveness and stability.
A wave of deregulation should give European banks some leverage to lobby for an easing of Europe’s already more onerous rules, a banking executive told Reuters.
The U.S. banking industry expects Trump to usher in Republican regulators easing capital rules and merger approvals and further watering down the controversial final Basel III proposal to require big banks to hold more capital.
But the pace of deregulation will be determined by new regulators and key policymakers that Trump has yet to nominate, making the outlook highly uncertain.
Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, believes Trump may also undo parts of the 2010 Dodd-Frank financial reform law, which tightened regulations on banks, to avoid another 2008-style implosion.
“In addition, M&A activity is expected to increase due to fewer Federal Trade Commission (FTC) restrictions, which should lead to higher investment banking fees,” he told Reuters.
“We can also expect an increase in regional bank mergers. In contrast, European banks with more stringent regulations will be helpless in the competition.”
The long-awaited restart of European banking M&A activity this year may be led by UniCredit Bank of Commerzbank and BBVA bid SabadellBut neither agreement is guaranteed as they deal with political opposition.
Filippo Maria Alloatti, head of financial credit at Federated Hermes, said U.S. banks will be the main beneficiaries under Trump. But he said international banks with large U.S. operations, such as Barclays, Deutsche Bank and UBS, should also see a “positive impact.”
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