11 October 2015

Financial Times: Europe needs home-grown bulge bracket banks

On one side are those who think the European banking system should be organised around small and medium-sized domestic or regional banks, none of which should be large enough to pose a threat to financial stability. They advocate separating retail banking from investment banking activities, and ending the universal banking model. On the other are those who believe that capital markets can only be deepened with the participation of strong investment banks with headquarters in Europe.

While this tussle continues, American investment banks are playing a bigger and bigger role in financing the global economy. A handful of robust US universal banks are gaining market share abroad while strengthening their positions at home, in large part thanks to regulation that makes it more difficult for foreign players to operate in the US. The top five US banks accounted for 59 per cent of the global wholesale market in 2014, compared with only 48 per cent in 2009. The share of the top five European investment banks dropped from 35 to 31 per cent over the same period. US banks are stealing a march in Europe, too, arranging 22 per cent of the euro-denominated bonds issued this year, up from about 8 per cent in 2010.

This formidable competition demands a response. Worryingly, Europe is considering several counterproductive steps. Eleven EU countries plan to introduce a financial transaction tax in 2016. The impact of structural reform could be particularly damaging for banks if not carefully thought through. Measures proposed differ significantly from those introduced at a national level in some cases and are technically less sound. If we are not careful, then these proposals would have the potential to damage banks’ ability to undertake market-making and provide other services in support of their corporate clients.

Does Europe want its own investment banks to be capable of operating efficiently in capital markets? Or are European states happy to look outside Europe for investment banks which can finance their debt? Are they willing to force European companies to rely solely on non-European banks for their investments and hedging solutions?

Such reliance would be unwise. In the last crisis, American banks came under intense pressure to reduce their European assets. Having banks able to finance European companies is an essential part of the EU’s economic sovereignty. Europe’s industrial champions will be at a serious disadvantage if they cannot rely on access to capital when their rivals in America and China can.

Europe needs efficient and robust retail banks. But it also needs a few large players with strong capabilities on financial markets. Europe’s prosperity and its influence on global capital markets are now at stake.

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