Ana Botin, president of the Spanish banking group Santander. (EPA-EFE / RODRIGO JIMENEZ)
European banks are not under the market. Several of them reported their quarterly results in recent days. Falling activity, more corporate bankruptcies and defaults, trade losses… Worse is that the US banks are now in health.
Several European banks have published quarterly results in recent days and these are only to be called penile.
- 1.26 billion euros loss for the Société Générale after a loss of 326 million euros in the first quarter.
- Deutsche Bank set aside € 761 million in the second quarter to absorb losses on bad loans due to the corona crisis.
- 57 million euros loss for the investment bank Natixis.
- HSBC is doing slightly better with a profit of $ 192 million, but a decrease of 96% year-on-year.
- Spanish giant Santander took the top with a loss of 11 billion euros in the second quarter.
- British bank Barclays also set aside £ 1.6 billion to mitigate default risk. Among other things, the bank fears that some private individuals will no longer be able to repay their consumer credit.
There are plenty of explanations: slowdown in activity due to lockdowns, losses on both trading and investment activities, write-downs on assets, risk-related costs, and masses set aside for defaults and potential losses. Then there are the geopolitical tensions (Brexit and the Sino-American conflict, etc.).
Eurozone banks face a number of structural problems
1. Their assets (mainly loans) are increasingly risk-bearing due to the many successive crises, while their liabilities (mainly deposits) must remain risk-free.
2. This is only possible if banks build ever larger capital buffers to absorb potential losses on their assets. The Covid-19 crisis will mean that those buffers will have to increase even further. (A consultant calculated that Covid-19 European banks in one worst-case scenario with an additional loss of 947 billion euros.)
3. Banking therefore becomes increasingly risky, which means that a higher premium must be paid on bank shares, which drives the cost of bank capital higher.
4. A high level of expensive capital drives the cost of the services offered by banks higher, which is a brake on the economy.
American banks are in good health
These are all valid arguments. Yet there is a problem… and that is the health of the American banks.
Goldman Sachs recorded the same profit in the second quarter as a year earlier. Morgan Stanley even recorded a record profit in the second quarter. Bank of America and JP Morgan saw their earnings drop, but those results remain incomparable to the losses European banks suffered.
The relaxation of the Volcker Rule
These are investment activities that have enabled US banks to achieve good results. In Europe, regulations (capital and liquidity restrictions) remain very strict. But in the United States, the causes of the 2008 crisis have been forgotten. The Trump administration has relaxed regulations.
In June, the Volcker Rule, which separated the trading and commercial banking activities within the same bank, was strongly weakened. The changes will once again make it easier for US banks to step into venture capital funds or set up platforms for investment in small businesses and startups.
American banks can therefore calmly prepare for the next financial crisis. Meanwhile, they have recaptured investor confidence by the way to crush European competition.