European banks are confronting significant hurdles as U.S. deregulation under Donald Trump’s second term emerges. While European institutions have struggled with profitability since the 2008 financial crisis, American banks have thrived, particularly in investment banking. Despite a recent rebound for European banks, the anticipated U.S. regulatory changes could widen the gap. Increased lending and capital optimization in the U.S. may outpace European efforts, prompting discussions among policymakers about balancing competitiveness and stability in a shifting financial landscape.
by Tommy Reggiori Wilkes and Sinead Cruise
European Banks Face Challenges Amid U.S. Deregulation
LONDON (Reuters) – The anticipated wave of financial deregulation under Donald Trump’s second term poses significant challenges for European banks striving to narrow their profitability gap with American institutions.
Since the global financial crisis of 2008-2009, banks in the eurozone and the UK have struggled with low profits and sluggish economies, while American banks have seen substantial growth, particularly in the investment banking sector, where they have gained considerable market share over their European counterparts.
This year, some European banks began to regain lost ground, with European stock performance outpacing that of American banks. Furthermore, there was growing optimism that the U.S. might adopt elements of Basel III regulations, requiring American banks to maintain higher capital reserves, which could help create a more balanced playing field.
However, Trump’s recent electoral victory has shifted the dynamics. Shares of major American banks such as JPMorgan, Goldman Sachs, and Morgan Stanley surged, while the STOXX Europe 600 Banks index experienced a decline of over 1% this week.
The Divergence in Banking Strategies
‘The contrast is clear: U.S. deregulation and tax cuts stand in stark opposition to strict regulatory frameworks and low interest rates prevailing in Europe,’ explained David Materazzi, head of the automated trading platform Galileo FX in Italy.
‘If American banks receive the anticipated political backing, they could significantly increase lending volumes and optimize their capital structures in ways that European banks currently cannot match,’ he elaborated.
Since 2010, European bank shares have dropped by 10%, while American bank stocks have more than tripled in value. The European Central Bank (ECB) has indicated that the return on equity for eurozone banks is approximately 5%, compared to 10% in the U.S. This disparity is attributed to higher commission revenues in the U.S. and the lingering impact of non-performing loans that European banks are still addressing.
As European policymakers gear up for this new landscape, Swiss Finance Minister Karin Keller-Sutter mentioned her discussions with British counterpart Rachel Reeves on the implications of American banking regulations. ‘We anticipated a wave of deregulation in the U.S.,’ she noted, emphasizing the need to strike a balance between competitiveness and stability.
A banking executive suggested that this potential deregulation could empower European banks to advocate for a relaxation of rules within their own jurisdictions. Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, speculated that Trump might also reverse some provisions of the Dodd-Frank Act, which was implemented to enhance bank regulation and prevent future financial crises.
‘We can also expect an uptick in mergers and acquisitions, with a less restrictive Federal Trade Commission, which should result in increased investment banking fees,’ he remarked. ‘In contrast, with a more stringent regulatory environment, European banks may lack the same tools for expansion.’
(Reporting by Sinead Cruise and Tommy Reggiori Wilkes, with contributions from Elisa Martinuzzi in London and Jesus Aguado in Madrid, French version by Bertrand De Meyer, edited by Kate Entringer)
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