Is the faster recovery of banks in the US over the European banks caused by wrong policy, or the traditional sluggishness of Europe as compared to America?
The financial crisis has hit us hard. And each economy has responded differently to the crisis. Amid such strain, the banking sector in the United States is recovering much faster than European one. While banks in the US posted revenues $138.5 billion in 2015 billion, European banks posted revenues of less than half of that number, $ 60.1 billion. Are the differences in recovery mechanism related to policy? Or are banks inherently differently built in both these economies?
There seem to be some significant differences primarily in two aspects: market and business models. Banks in the US have a much more dynamic and growing market, different regulations, as well as different business models than their European counterparts. For example, Banks in the US have strong and improving credit ratings, and they lend more in the long run. European banks, on the other hand, borrow more in the short term, and are constantly struggling with low liquidity. Insolvency of banks in Europe is mostly caused by the monetary system, since the ECB is inclined towards controlling inflation, but not the stability of the financial system. In periods of crisis, member states cannot print money, and, there are no internal loans between banks. In line with this function, banks in the US invest more in mergers and acquisitions than EU banks. The outcome of this has been illustrated by the drastic decrease in investment volume across the world due to the economic crisis, and the influence of it on these sets of banks; banks in the US recorded a smaller decline (0.8%) in 2015 than European banks (8%).
Besides these obvious differences, European banks struggle with debt collection, with several of them already being in the bailout process. The best examples are the Monte dei Paschi di Siena which has $400 billion in bad loans, and the Deutsche Bank. Oil prices played a huge role in assessing investor confidence and subsequent financial climate in both the economies. This, in particular, because of the difference in exposures of these different sets of banks.
There seems to a respite after all, in such a sensitive environment. Although the problems in EU banks are more than evident, there is hope that the banks will be back on track to recovery. Investors, however, may not be convinced because there is popular belief that such reports may be false, with accounting data on the one hand, overestimating the value of capital. Italy’s Monte dei Paschi bank stands first in line in such arguments.
Reconstruction and resurrection has perhaps played the most essential role in the banking system. banks in Europe, though on the path to recovery, are yet to completely resurface and revive from the financial turmoil experiences, because of continued distress, both geo-political and socioeconomic, from different parts of the economy. The first step must be to recapitalize and remove bad loans through bailouts. Collection of large amounts of fresh capital, if they terminate payment of the dividends and eliminate buybacks may be another option. Banks in Europe have been unable to showcase reality when it came to balance sheets or investor presentations. They must account for higher risk on mortgage loans. This is a multi-pronged approach. Realistic reports, garnering of investor confidence, lesser vulnerability of financial institutions and increased scope of loans would be some advantages to the system.