European banks trump their U.S. counterparts – How?

TL;DR Breakdown

  • European banks are showing greater resilience and performance compared to their U.S. counterparts according to experts at the Institute of International Finance conference in Brussels.
  • Even though the largest U.S. bank equals the worth of the top nine or ten European banks, the latter exhibit superior levels of credit default swaps, indicating a lower debt risk.

In a surprising turn of events, financial pundits at the Institute of International Finance conference in Brussels this week are lauding Europe’s banking sector, noting a remarkable resilience in their performance that outpaces their American counterparts.

Stalwart performance

Emanating from the heart of Europe’s financial sector, Santander Group’s executive chair, Ana Botín, recently illustrated an intriguing paradigm shift.

Even though the largest bank in the U.S. equals the worth of the top nine or ten European banks, Botín reveals an unexpected silver lining in the continent’s performance.

The key, she argues, lies in the superior levels of credit default swaps among the top European banks, a crucial insurance form protecting a company’s bondholders from default. The implication? Fixed-income investors consider the debt risk of Europe’s premier banks lower than that of the U.S.’s finest.

This rising strength of European banks is not indicative of an imminent systemic banking crisis, Botín pointed out, referring to the recent volatility that led to the sale of Credit Suisse to UBS.

The reality, she suggested, is far more optimistic, “We are in a very strong position in terms of capital, liquidity supervision, protection of our customers’ data.”

The European banking sector: Safer, stronger, cheaper

Adding weight to Botín’s assertion, Davide Serra, the CEO of Algebris Investments, presents a bold triptych: Europe’s banks are “safer, stronger, cheaper” than those in the U.S. This triumphant claim is rooted in the superior liquidity ratio of the banks, standing at an impressive 160% compared to a meager 120% in the U.S.

Serra explores the contrast further, indicating the U.S. banks’ focus on optimizing their deposit base more, “And now with the Fed [Federal Reserve] keeping higher interest rates, people just want to get paid on their deposits.

So they have options with money markets, or with moving cash around.” In the wake of several regional bank collapses in the U.S., Serra anticipates further consolidation, with safe banks reaping the benefits.

Reform and integration: The way forward

While European banks’ low valuations present a lingering challenge, José Manuel Campa, chair of the European Banking Authority, holds an optimistic outlook. He sees improvement on the horizon, especially as interest rates rise and banks prove their business models’ sustainability.

Campa and Botín further champion the cause for tighter regulation, integration, and collaboration to spur growth. Botín emphasizes the need for securitization, a contentious topic post the subprime mortgage crisis, yet a key element to the EU’s proposed Capital Markets Union.

“The securitization market in Europe is 6% the size of the American market. Banks are no longer the best holders of credit,” Botín said.

Amid ongoing discussions over the Capital Markets Union and a more robust banking union in the EU, Campa and Botín believe that pushing forward these complex negotiations is vital for the sector’s future and Europe’s growth.

In sum, as Europe’s banking sector demonstrates surprising resilience and potential, it invites us to rethink our assumptions about global finance.

As our eyes turn to the old continent, it is clear that the continent has become an enticing prospect for the world of banking, offering new opportunities and challenges that might reshape the financial landscape.

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Jai Hamid

Jai Hamid

Jai Hamid is an enthusiastic writer whose current area of interest is the blockchain sector. Whenever she is not reading or writing, you can find her tending to her plants in the garden. She strongly believes that crypto is going to transform the world for the better.