European and US banks are both masters at playing this game. On the one hand, executives like Frédéric Oudéa of Société Générale, or John Cryan of Deutsche Bank argue that it’s essential for Europe to have European-headquartered investment banks.
Without native talent, they argue, Europe’s companies will suffer through a lack of access to finance, and a lack of global partners. European governments may struggle to raise finance, while European capital markets will continue to lack depth and scale.
Economically essential activities like raising debt and equity and providing financial market liquidity will be dependent on the whims of Wall Street boardrooms, rather than the wisdom of European politicians.
This is nakedly self-serving, as is the opposite claim made in the US, that global banking regulations have been rigged in favour of the Europeans and against US firms.
In this view, the move to Basel risk-weighting was the original sin, allowing the mortgage-swollen balance sheets of European banks to appear much smaller than they really are, and allowing them to use depositors’ funds to back trading books instead.
More recently, other issues have come into focus. Basel’s charge for being a global systemically important bank (G-SIB), for example, hits the US banks hardest, because they bank their whole country, while European G-SIBs tend to dominate one or two countries at most. Adding insult to injury, the charge is calculated on a euro-denominated balance sheet, so every rise in the dollar-euro rate means US banks risk being pushed into a higher capital bracket.
It’s clearly true that home jurisdiction matters. Banks might like to trot out the hoary old claim about being "truly global”, but look at the nationalities in the boardroom. Deutsche’s chief executive might be a Brit, but three quarters of the board are German. More than 60% of SG’s board are French.
Naturally, these are not just any Germans or French or Brits or Americans. Boards are filled with individuals who bring deep political and industrial connections, formed especially in their country of choice. To take SG again, three of the 13 directors attended the Ecole Polytechnique, with two others going through other grandes ecoles.
That brings with it bias, and so does historical business mix. While the US firms do 60%-70% of their business in North America, their commitment to, say, market-making in OATs might be, at the margin, less robust than their commitment to dealing US Treasuries. That’s unavoidable.
If the shutters really come down on cross-border banking, they’ll back US business not EMEA, and Europe will lose its top underwriting banks.
But broader European economies, until that happens, benefit from the globe-trotting US firms. When Oudéa wrote in to the Financial Times to make his case for European banking, he included this revealing line:
“Europe’s telecommunications industry is a vision of the backwards future that may be in store for European finance: a string of mid-size players whose products have been commoditised — and whose margins have been squeezed — by the US internet giants.”
That’s absolutely true. But a European phone contract costs much less than a US one. Competition has been cut-throat, and enhanced, not damaged, by regulation. Europe’s telecommunications industry may not be as profitable as the likes of Verizon or AT&T but it works much better for Europe’s consumers.
Though the boardroom and home regulator matter, it’s also worth looking at just how deeply rooted the ostensibly American firms are in EMEA, especially when the advocates of national investment banks argue they could cut and run at any moment.
Citigroup, for example, allocates $16.7bn of capital to its UK entity, Citigroup Global Markets Limited, which handles most of its EMEA investment banking and trading business. It has other European entities as well — Citibank International plc, Citibank UK, and a large Irish entity.
That puts Citi’s European entities firmly in the same league as the homegrown Europeans.
BNP Paribas is the largest bank in Europe by balance sheet size, and allocates €17.9bn to its CIB operations, split between €8.5bn in global markets and €8.8bn in corporate banking. SG’s whole “global banking and investor solutions” business is supported by €12.4bn of capital. Those figures cover the whole globe, not just EMEA entities.
To put it another way, Citi as a European investment bank is not just in the top tier by results, it’s also there by dint of its capital commitment. It has put its money where its mouth is, and leaving its EMEA operation behind is nigh on unthinkable.
So when the next anxious voices are raised about the role of the US banks in Europe, remember this: they’re just as committed as the biggest homegrown institutions.