Trump’s Victory Throws European Banks Into Deeper Earnings Gap
The recent victory of Donald Trump in the 2024 U.S. presidential election has cast a long shadow over the European banking sector, exacerbating an already significant earnings gap with their American rivals. While hopes were rising that European banks were beginning to close the gap, the anticipated wave of deregulation under a second Trump administration threatens to widen the disparity, potentially leaving European institutions struggling to compete in a rapidly changing global financial landscape.
Key Takeaways: Trump’s Win and the European Banking Sector
- Trump’s victory signals potential deregulation in the U.S. banking sector, directly contrasting with the stricter regulatory environment in Europe.
- American banks are poised to benefit from this deregulation, potentially boosting lending, optimizing capital, and increasing profitability.
- European banks face the challenge of closing a sizeable earnings gap against their American counterparts, a gap that has existed since the 2008 financial crisis.
- The STOXX Europe 600 Banks index fell more than 1% in the week following the election, demonstrating immediate market reaction to the news.
- European policymakers are already discussing the potential ramifications of U.S. deregulation and are considering a strategic response.
The Widening Earnings Gap: A Long-Standing Issue
The profitability disparity between U.S. and European banks is not a new phenomenon. Since the 2008-2009 global financial crisis, European lenders have struggled with weak economies and tight regulations leading to poor profitability. In stark contrast, U.S. banks have experienced significant growth and market share gains, particularly in investment banking. This success is partly attributed to the historically higher fee income generated by U.S. institutions and the long-standing challenge of dealing with legacy non-performing loans in Europe. The European Central Bank estimates that the return on equity for euro zone banks fluctuates around 5%, compared to approximately 10% for their U.S. counterparts. This significant difference underscores the severe competitive imbalance. Since early 2010, European banking shares have fallen by 10%, while U.S. lenders have more than tripled in value, highlighting the stark difference in performance.
The Basel III Impasse
There had been a glimmer of hope that the gap might begin to narrow. The potential adoption of elements of Basel III regulations in the U.S., requiring banks to hold more capital, was seen as a step toward a more level playing field. However, Trump’s election has dashed these hopes, as his administration is likely to prioritize deregulation. This directly counteracts the efforts of organizations like the Basel Committee on Banking Supervision to implement higher capital requirements for global systemic importance banks (G-SIBs).
Deregulation on the Horizon: Implications for European Banks
The expectation within the financial markets is that a second Trump presidency will lead to a significant wave of financial deregulation in the United States. The proposed easing of capital requirements, coupled with potential tax cuts, creates a vastly different regulatory and economic environment compared to Europe’s strict oversight and persistent low interest rates. This difference will likely exacerbate the existing earnings gap. **“The expectation is simple: deregulation and tax cuts in the U.S. contrast with Europe’s strict oversight and low-interest-rate grind,”** stated David Materazzi, CEO of Galileo FX. This sentiment is echoed throughout the financial community. The potential for increased loan volumes and optimized capital utilization for U.S. banks is significant and will likely be difficult, if not impossible, for European banks to match in the short term.
Lobbying for Change in Europe?
There are already indications that European politicians are preparing for this shift in the global regulatory landscape. Swiss Finance Minister Karin Keller-Sutter and her British counterpart, Rachel Reeves, have discussed the potential impact of U.S. deregulation. **”It was said beforehand that a wave of deregulation was coming in the USA,”** Keller-Sutter told Reuters, emphasizing the need to balance competitiveness and stability. One banking executive suggested that this wave of deregulation could even give European banks some leverage to lobby for similar easing of rules within Europe. However, this outcome is far from guaranteed and depends heavily on the domestic political climate in each European country.
The Uncertain Future: Trump’s Unpredictable Regulatory Agenda
The ultimate extent of U.S. deregulation remains highly uncertain. While the U.S. banking industry anticipates a significant easing of capital rules, merger approvals, and a dilution of the Basel III endgame proposal, the specific policies enacted will depend on the individuals Trump appoints to key regulatory positions. The speed at which any deregulation is implemented is another critical unknown factor. There is potential for considerable delays and unexpected hurdles in the process.
The Potential Unraveling of Dodd-Frank
Analyst Michael Ashley Schulman anticipates Trump may move to rollback key provisions of the 2010 Dodd-Frank financial reform law, a cornerstone of post-2008 financial regulation. The potential weakening or removal of restrictions intended to prevent another financial crisis could have profound and far-reaching effects upon the American and Global financial sectors. **“Additionally, an uptick in expected corporate M&A because of a less restrictive FTC (Federal Trade Commission) should lead to increased investment banking fees,”** Schulman noted. Increased mergers and acquisitions in the U.S. would likely lead to further benefits for American institutions, placing European banks at an even greater disadvantage.
Mergers and Acquisitions: A European Response?
While the U.S. anticipates a wave of deregulation-driven mergers and acquisitions, long-awaited M&A activity within European banking has, in fact, begun to pick up. There are currently several significant transactions under review, including a potential takeover of Commerzbank by UniCredit and BBVA’s bid for Sabadell. However, these deals face significant political headwinds and uncertainties, highlighting the significant challenges facing European banks even when acting proactively. The relative ease of mergers and acquisitions in the deregulated U.S. landscape provides American banks with a significant advantage over their European counterparts.
International Banks: Potential Winners and Losers
While U.S. banks are expected to be the primary beneficiaries of deregulation, Filippo Maria Alloatti, Head of Financials Credit at Federated Hermes, suggests that international banks with substantial U.S. operations, such as Barclays, Deutsche Bank, and UBS, could also experience some positive effects. These effects are likely to be secondary and contingent upon the specific actions of the U.S. government. The advantage gained by American banks is likely to significantly outweigh any potential benefits experienced by those international institutions with a presence in the U.S.
In conclusion, Trump’s election victory has created a formidable challenge for European banks already facing a significant earnings gap. The anticipated wave of U.S. deregulation, combined with Europe’s stricter regulations, creates an uneven playing field that is likely to widen the existing disparity. The short-term outlook appears bleak, and the long-term consequences remain uncertain. The situation strongly emphasizes the need for European banks to develop and implement comprehensive strategies to address the competitive landscape.
