European bankers have known it for a while, but they’ve been powerless to stop it. US banks are eating more and more of their lunch every year.
Brussels-based think tank Bruegel said on Monday that as early as this year, US banks could have a larger share of the European investment banking market than their European competitors. Europe’s banks have been by and large turning away from pan-European investment banking to concentrate on local and core markets, Bruegel said.
The danger for Europe as the US banks encroach on their territory isn’t just economic, it’s prudential.
European regulators may end up with only indirect control over the institutions which dominate local markets. While regulators do cooperate, if all the institutions involved are American, regulators will lose essential insight into how their capital markets function, and the build-up of any risks or complexities.
That loss of control is compounded by the US's tendency to get its way on international regulation — take the total loss-absorbing capacity (TLAC) rule, or the insistence by the Federal Reserve that European banks operating in the US form intermediate holding companies. The major US regulators have a long tradition of talking up international cooperation while going their own way in practice. Even Basel II never really worked in America.
Meanwhile, the big flagship financial initiative for the Juncker Commission, Capital Markets Union, is hitting a wall. CMU's intention is to reinvigorate European capital markets, disintermediate banks, deliver a better savings market for European savers and give easier access to credit for European borrowers.
However, Dutch MEP Paul Tang, a member of the influential ECON Committee in the European Parliament, is said be holding up the project, apparently to ensure the plan doesn’t end up rolling back post-crisis regulations.
The result of Tang’s push is likely to be delays and hurdles for the EC’s initiative.
With CMU in limbo, that will only accelerate the weakening of Europe's investment banks. There's no doubt Europe is over-banked, but capacity isn't coming out of the weak second tier institutions — banks like Banca Monte dei Paschi di Siena and Dexia are still staggering on with the aid of state support and repeated rights issues.
Instead, it's coming out of the top tier. The banks which lay out balance sheet to Europe's biggest employers, which have seen the toughest regulatory treatment, and the largest fines, are also the banks that CMU could benefit most.
Bruegel doesn’t have much to offer in terms of a solution for stopping the bleeding, and said that the EC should continue to see its banking system as a “strategic sector”, and that regulators should strengthen the already existing US-EU bilateral regulatory negotiations.
It also recommends European corporates mandate a European bank for their deals, even if they don’t need them, as a hedge against the possibility US banks pull out of Europe during a period of distress.
This seems unlikely to stop the decline — European investment banks need to be winning juicy left lead business on their own merits, not collecting co-manager roles as consolation — so instead Europe should forge ahead with policy.
As the Juncker Commission tries to break through the CMU delays, it should make it clear to European states that they are looking at losing control of their own banks, and handing over the reins to the very institutions they blame most for the crisis, US investment banks.
A speedily implemented, comprehensive CMU should be pitched not just as a win for European economies, but for European regulatory competence and control. Sadly, getting it through Parliament will be easiest if it is pitched as a way to keep the Americans at the gates.