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Menace to Societe

12 October 2015 By Dominic Elliott, George Hay

European investment banks are being bested by their U.S. rivals. The bosses of Societe Generale and Barclays warned on Oct. 11 that they were losing the battle for capital markets, trading and advisory fees. They are right, but there is no easy solution. Europe needs better capitalised banks more than it needs dominant, globally competitive institutions.

The top five Wall Street banks – Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley – generated $139 billion in investment banking revenue in 2014. The top five European Union wholesale banks – Barclays, BNP Paribas, Credit Suisse, Deutsche Bank and UBS – generated less than half that much. That is a 6 percent increase for the Americans compared with a 30 percent fall for their European competitors since 2010, according to Breakingviews analysis.

SocGen Chief Executive Frederic Oudea says European quirks like a financial transactions tax and the threat of an enforced structural separation of investment and retail banking make it even harder to fight back. He has a point. Those restrictions are respectively misguided and superfluous. And American banks have other advantages: broker-dealers get the fee pool that comes from having the world’s biggest capital market in their backyard, and benefit hugely from the lack of mortgages on their books, which keeps their total assets under control.

But European banks, and their former regulators, deserve their share of the blame. Partly because they started the post-crisis rebuilding more quickly, U.S. banks’ capital-to-asset leverage ratios were all above 5 percent last year, while only UBS was above 4 percent for European peers. The way bank risk-weighted assets and capital are defined in Europe is so inconsistent that the European Central Bank has to undertake a bank-by-bank solvency study every year.

Sorting this out means the top bracket of global investment banks may lack a European player, at least in the short term. This is a shame, but not a mortal wound. European corporates can still hedge themselves and raise capital from U.S. outfits, and if Americans retreat in the next crisis there should still be a sufficient number of EU peers to step in. In the long run, properly capitalised European investment banks would be a worthier source of pride than unsustainably competitive ones.


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