U.S. President Donald Trump has pledged to roll back rules he says are inhibiting U.S. banks. This Trump’s Rule-Slashing is bad news for Europe’s banks still struggling to craft a post-financial-crisis business model that can deliver a sufficient return on equity to satisfy their shareholders.
Trump signed two directives at the end of last week aimed at curbing bank regulation. “We’re going to attack all aspects of Dodd-Frank,” Gary Cohn, the former Goldman Sachs President who’s now director of the White House National Economic Council, told Bloomberg Television on Friday. “Banks have been forced to hoard capital.”
The law was brought in after the 2008-09 financial crisis with the aim of avoiding another financial meltdown.
“Dodd-Frank is a disaster,” Mr Trump said earlier this week. Dodd-Frank, named after the Congressmen who campaigned for the legislation, was introduced to rein in banks’ risky practices by banks and other financial companies. No matter how hard it proves for Trump to negate Dodd-Frank, legislation introduced in the wake of the financial crisis designed to make the banking industry safer, it’s clear that he agrees with U.S. bank chiefs that the rules are too limiting. Allowing them to put aside less capital would tilt the playing field in their favor and against their European peers.
At a banking conference last month, the head of capital markets at a big European firm said it was ironic that the meltdown in the U.S. mortgage market triggered the financial crisis that’s led to tighter regulations, and yet the U.S. banks looked likely to be first to get relief from those rules, thus giving them a competitive advantage.
To be clear, European banks are in large part the architects of their own post-crisis misfortune. They were much slower than their U.S. counterparts to recognize that they needed new capital to bolster their balance sheets. And they fought against every new rule proposed by regulators designed to prevent future mishaps becoming the burden of taxpayers.
The result is clear from their share price performance relative to their U.S. peers. Trump’s Rule-Slashing is bad news for Europe’s banks because a six-month rally in European bank shares leaves them exactly where they were five years ago as measured by the Euro Stoxx bank index, a stark contrast to the gains delivered by the bank index of the S&P 500:
European banks have been retrenching in the international capital markets, ceding ground to their U.S. competitors. In global loans, for example, the top four underwriters are JPMorgan, Bank of America Merrill Lynch, Citigroup and Wells Fargo, with a combined market share in 2016 of more than 32 percent. The next three most-active banks are Barclays, Deutsche Bank and HSBC, with Credit Suisse in ninth place and the European firms sharing just 13 percent of the business among the top 10. European banks process of fiscal consolidation after 2008 crisis is slower than that one of the US banks. Actually Trump’s Rule-Slashing is bad news for Europe’s banks, the risk is that they will face another crisis before they stand up after the last one.
In international bond underwriting, the five leading U.S. banks managed almost 31 percent of last year’s sales, leaving the Europeans in the top 10 with just 25 percent of the market.
And in equity offerings in Europe, the Middle East and Africa for 2016, the five top-10 U.S. firms had a combined market share of more than 36 percent, while the five European firms had less than 28 percent.
I’ve argued before that Europe’s finance firms risk becoming irrelevant if they cede too much market share to their U.S. counterparts. Trump’s dismantling of Dodd-Frank looks likely to give U.S. banks more capital to commit to winning business at a time when European firms are still trying to improve their balance sheets, for this reason Trump’s Rule-Slashing is bad news for Europe’s banks.
Unicredit began selling new shares to raise 13 billion euros ($14 billion) of fresh capital. While the deal is fully underwritten by a who’s-who of investment banks (meaning Unicredit gets its money no matter what), the willingness of investors to back Italy’s biggest bank is a key test of confidence in the industry.
If the fundraising effort falters, and the amount sought is about same as Unicredit posted as an annual loss for 2016, it’ll be clear that Trump’s Rule-Slashing is bad news for Europe’s banks and shareholders remain unconvinced that European banks can achieve the strong footing of their U.S. peers.