U.S. banks are gaining in Europe and their stocks are beating European and U.K. rivals


It has now been more than 15 years since the white heat of the global financial crisis, when Lehman Brothers, Bear Stearns, and the Royal Bank of Scotland (among others) failed. At the time, big banks deserved the tidal wave of opprobrium that came their way, and they duly accepted huge increases in capital requirements, dividend bans, and other controls on distributions and pay. Just a few years ago, those who put their heads above the parapet to argue that enough was enough still found bullets whistling past their ears.

But has the mood finally changed? Have banks’ political reputations been rehabilitated now that the ravages of financial crisis have receded into the past, and following a pandemic in which they were part of the solution, rather than the origin of the problem? The answers to such questions depend very much on geography.

For example, if you are in the United States, three notable bank failures in 2023 — Silicon Valley Bank, First Republic and Signature Bank — might lead you to expect that banks are pariahs. But that has not stopped U.S. banks from adopting an aggressive stance in relation to the U.S. Federal Reserve’s proposals for rigorous implementation of the final part of the Basel 3 capital reforms.

Regulators have taken to calling these reforms “Basel 3.1,” which suggests that they are just a tidying-up exercise to deal with a few loose ends. But U.S. banks prefer “Basel Endgame,” which has rather different connotations. Whether the reference to Samuel Beckett’s apocalyptic play is deliberate, I could not say, but it certainly ups the ante considerably. The Bank Policy Institute — a banking industry trade group — has been running ads warning that the proposals would saddle families and small businesses with higher borrowing costs, or even a loss of access to credit.

It is too soon to say whether the Fed will be moved by this campaign. But it is hard to imagine such a thing in Europe. I strongly doubt that European banks would have the self-confidence to take their arguments about capital requirements — and they do indeed have some — to the court of public opinion, where the jury remains heavily stacked against them.

As interest rates have risen, bank profitability has increased after several lean years. Eyeing useful revenues from tax hikes that might even be popular, many European countries have implemented special tax regimes targeting the banking sector. Spain has introduced a tax on revenues, not just profits, and Slovakia recently announced something similar. Italy’s new tax regime is of Byzantine complexity, but will raise some additional income. And Belgium has floated a retail-focused government bond issue explicitly designed to pull deposits out of the banking sector, where, in the government’s view, they were not properly remunerated. The result was something like a government-sponsored bank run.

It is no surprise that governments on both the left, as in Spain, and the right, as in Italy, have reached similar conclusions about banking. Socialist voters have never loved bankers, and Europe’s extreme right wing — which is on the rise almost everywhere — has always flirted with rhetoric about banker conspiracies, usually with a Rothschild or two lurking in the shadows.

As usual, the United Kingdom is in the middle between the U.S. and Europe. While it has not introduced any new targeted tax increases, it does already have a special bank levy dating back more than a decade. Much of the political pressure recently has focused on the perception that banks have been slow to pass through interest-rate hikes to depositors. Accordingly, the Bank of England’s (BOE) own Basel 3.1 plans are somewhat tougher than those envisaged on the other side of the Channel.

Still, the U.K. government has taken one measure that is sure to make (a few) bankers happy: it eliminated the restriction on bonuses. In 2014, the European Banking Authority capped bankers’ bonuses at 100% of basic pay, or 200% with explicit shareholder approval. The BOE opposed this policy at the time, arguing that increasing the fixed proportion of investment bankers’ and traders’ pay would make their institutions more vulnerable in a downturn.

By removing the cap, the U.K. will make U.S. banks in London more attractive to recruits than their European counterparts (Barclays will be the only U.K. bank that is particularly affected, because it is the only one that still has a sizable investment banking operation). One might therefore have expected EU banks to argue that the cap should be removed across the continent. But, so far, they have held their tongues. Hostility toward bankers remains strong within the European Union, and European Parliament elections are coming in June. A U.S.-style ad campaign demanding seven-figure bonuses for struggling derivatives traders might not generate the desired reaction.

So, it looks as though European banks will remain unloved and unfree, while U.S. banks continue to gain market share in Europe, with their share prices (relative to book value) rising significantly higher than those of banks in the EU or the U.K. This is hardly ideal. With its economy struggling to recover momentum after COVID-19 and Russia’s invasion of Ukraine, Europe needs a competitive banking system. Its regulatory and tax environment ought to be determined by rational analysis, not memories of past sins. Mario Draghi, tasked by the European Commission to explore ways of enhancing the continent’s competitiveness, should bear this point in mind.

Howard Davies, a former deputy governor of the Bank of England, is Chairman of NatWest Group.

This commentary was published with the permission of Project Syndicate — Where It Pays to Be a Banker

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