How US Banks took over the financial world
Ten years after the global financial crisis, Europe’s banks are in retreat
Martin Arnold in London
© FT montage/Dreamstime
Three days before Lehman Brothers filed for bankruptcy in September 2008, Bob Diamond was ushered into a large conference room with “buyer” hand-written on the door at the New York Federal Reserve Bank in Manhattan.
As the Barclays boss closed on a deal for Lehman, Mr Diamond says that the opportunity looked “wonderful” — even if he remains frustrated that he could not reach agreement before it collapsed which, he says, may have saved the world from the worst of the financial crisis. In the end, Barclays bought much of Lehman’s US operations out of bankruptcy.
At that time, Barclays was among the European banks riding high even as the US banking system went into meltdown, with ambitions to be among those left to pick over what was left after the subprime crisis had run its course.
A few months earlier, Royal Bank of Scotland had become the world’s biggest bank by assets by outbidding Barclays to acquire Dutch rival ABN Amro.
But as shares in the biggest US banks were being pounded by waves of panic about which might collapse next, few could imagine then how the implosion of the debt-fuelled housing bubble would ultimately result in the US financial sector surging back stronger than ever.
Over the next decade, Wall Street’s top groups would go on to establish a seemingly unshakeable dominance in global corporate and investment banking.
European banks, meanwhile, have been forced into a steady retreat — weakened by the subsequent eurozone debt crisis and overtaken in the global rankings by resurgent US rivals as well as the even faster growing Chinese state-owned banks.
According to figures compiled by the Financial Times, the top five European banks — HSBC, RBS, BNP Paribas, Barclays and Deutsche Bank — made close to $60bn of combined net profits in 2007. This was a fifth higher than the earnings of their main US rivals: JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs.
By 2017, the picture had changed drastically. The net profits of European groups had shrunk over two-thirds to $17.5bn, more than a quarter below the $24.4bn that JPMorgan earned on its own last year. Indeed, JPMorgan’s $380bn market capitalisation exceeds that of its five European rivals combined.
Between 2006 and 2016, the top five US banks gained 6 percentage points of market share in global wholesale banking revenues, while the top five Europeans have lost 4 percentage points, according to research by Oliver Wyman and Morgan Stanley.
Senior bankers trace the contrasting fortunes back to the different responses to the crisis on each side of the Atlantic.
The US, led by Treasury secretary Hank Paulson, forced its big banks to go on a crash diet by forcibly injecting government funds and blocking them from repaying it — or from paying dividends and bonuses — until they had passed a stress test.
“It totally stabilised the US system,” says Paul Achleitner, Deutsche Bank’s chairman and a former colleague of Mr Paulson at Goldman. “It allowed them to radically write off all kinds of stuff that they had there, and yes, they replenished. Over here [in Europe], you couldn’t possibly do any of the above.”
Bankers such as Mr Diamond and Mr Achleitner say Europe is now making a big strategic mistake by leaving itself exposed to increasingly blatant US economic nationalism, particularly under Donald Trump’s presidency. 'If you’re a bank, you’re bad, so let’s penalise you.'
Bob Diamond, former Barclays chief executive. © Charlie Bibby/FT“
As American banks have shown through history, they go hot and cold on commitment to markets outside the US,” says Bill Winters, the former JPMorgan executive now running the emerging markets lender Standard Chartered.
“So I think it would be imprudent for Europe to find itself in a position where their conduits to international capital markets are entirely companies that do not have a vested interest in the local economy.”
Others share the mounting concerns that US banks will retreat in the next crisis, leaving European companies with less access to funding.
Frédéric Oudéa, chief executive of Société Générale Deutsche Bank chairman Paul Achleitner
Bill Winters, former JPMorgan executive
“For European industry to have to rely on American banks for the raising of capital, for mergers and acquisitions, for intermediation of equity and investment is geopolitically somewhat challenging,” says Andrea Orcel, head of UBS’s investment bank, which has retrenched significantly since the crisis.
He describes UBS as a “little” David against Goliath. “David can win, but your challenge is a little bit steeper.”
European politicians, however, mostly seem untroubled, showing little sympathy for the continuing struggles of regional banks that are still considered politically toxic. Even the companies that rely on bank finance seem unfazed. Corporate treasurers point out that banks are queueing up in Europe to provide access to cheap funding.
Multinational companies typically have a stable of at least a dozen banks — a mix of local and international lenders that can support global operations — to meet financing needs. “European banks have retrenched, but others have stepped in to pick up the slack,” says Sarah Boyce at the UK’s Association of Corporate Treasurers.
But Ms Boyce, the former director of treasury at British chocolate maker Cadbury, says there is risk of complacency when banks are queueing up to service companies as they are now.
“In the last crisis everybody took their ball home and retrenched to their domestic market,” she says. “There is a real risk the American banks will do exactly the same in the next crisis.”
In the past decade, the five European banks tracked by the FT have shrunk their revenues by 20 per cent, their assets by 15 per cent and their workforce by almost 30 per cent. Meanwhile, their five Wall Street rivals have grown their revenues by 12 per cent and their assets by 10 per cent, while their headcount has shrunk by less than 10 per cent.
There are some who believe that Europe’s shrinking banks should be celebrated. Sitting in the peaceful courtyard of Oxford university’s All Souls College, where he is warden, Sir John Vickers says: “You had in effect a huge taxpayer-backed subsidy for risk-taking and that ended in tears. So pulling back from that is directionally a good thing.”
“The [banks’] balance sheets got so overblown with a lot of activities which I believe were completely unproductive so there is no social loss or economic loss in their disappearance,” says Sir John, who chaired the commission that drafted Britain’s policy response to the 2008 crisis.
Sir John Vickers: 'You had in effect a huge taxpayer-backed subsidy for risk-taking and that ended in tears. So pulling back from that is directionally a good thing.' © Charlie Bibby/FT
RBS remains the most extreme example of a European bank in retreat. For a spell in 2008, it was the world’s biggest bank by assets until being bailed out by Gordon Brown’s Labour government a month after Lehman collapsed.
Since then, RBS has been engaged in a drawn-out restructuring, shedding more than 60 per cent of its assets and 70 per cent of staff.
Ewen Stevenson, finance director at RBS, says the European corporate and investment banking market suffers from “an excess of capacity” that drags the profitability of most banks in the region down below their cost of capital, meaning that they are destroying value.
“So it is a concern, but it is a multi-faceted problem that I don’t think would get solved just by insisting that European investment banks continue to exist at scale,” he says.
As well as being slower to flush toxic assets out of their balance sheets, European banks have also suffered from the political stigma around the sector in the aftermath of the crisis.
“Across much of Europe you saw almost the application of biblical justice, which is if you’re a bank, you’re bad, so let’s penalise you, as opposed to let’s make you healthy again,” says Mr Diamond, who was pushed out by regulators as Barclays chief executive in 2012 and now runs private equity funds that buy assets from banks.
Since the crisis, most European countries have introduced bank-specific taxes and laws, such as the bonus cap and the Mifid II investor-protection rules, which do not apply in the US.
But Andrew Tyrie, the former chairman of the Treasury committee of backbench MPs who now chairs the Competition and Markets Authority, says the UK had little choice but to rein in its banks after the crisis because they had grown so large relative to the size of the British economy.
“As a proportion of GDP the US banking sector is much smaller than that of the UK, so the price of a regulatory mistake may be relatively less severe,” he says.
The US government is now unwinding parts of its post-crisis financial regulation, such as the Volcker rule restricting proprietary trading by banks, but Mr Tyrie says Britain must be wary of following suit.
“The UK cannot afford to allow any such reconsideration to weaken vigilance over systemic risk,” says Mr Tyrie, who chaired a parliamentary commission on bank reform.
There are structural reasons for the outperformance of US banks, which benefit from a dominant position in a homogeneous domestic market that boasts the world’s largest investment banking fee pool.
Europe has no truly pan-European banks, its economic growth remains sluggish, and the eurozone banking union is unfinished. Added to that, Brexit now looks set to further fragment the market.
Frédéric Oudéa, chief executive of Société Générale points out that US banks can charge triple the fees for an initial public offering and 30 per cent more for bond issues than in Europe. “I would not call it an oligopoly, but it is not far off,” he says.
At a time when the US is using sanctions against countries like Russia, Iran and Turkey as a way to harness the dominance of the dollar in international trade and achieve its foreign policy goals, some argue that strong, global banks are more important than ever for Europe.
Mr Achleitner says he has been asking politicians in Berlin if they are happy leaving the US to be the world’s financial policeman since he became chairman of Deutsche Bank six years ago.
His questions grew louder when the US panicked investors in 2016 by threatening Germany’s biggest bank with a $14bn fine for alleged mortgage securities mis-selling before the crisis.
“Six years ago they were quite indifferent to the question if we need big international banks in Germany,” says the Deutsche Bank chairman. “In the current political environment this position has changed fundamentally.”
For 60 years, most Europeans have assumed that their strategic interests are aligned with the US, but Mr Achleitner says this is now changing. “The hard-nosed fact is there may be elements where it deviates and they just become much more accentuated under the current US president,” he says.
Additional reporting by Patrick Jenkins
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