Author: William Pottenger
The financial crisis in 2008 was basically the result of a lack of liquidity, which means a borrower’s access to tangible assets to repay their debts. Ever since the global financial crisis, investment banking profits have not recovered to their pre-crisis levels.
Particularly in Europe, banks have been struggling. Widespread economic sluggishness has been part of the reason that banks like Deutsche and Credit Suisse have been performing poorly. Flat growth across the continent has not helped these European banks, but neither has their indecisiveness. Unlike European banks, American banks have enjoyed healthier profits.
According to a report from Dealogic, American investment banking arms reaped nearly 50 percent of global investment banking fees. On the other hand, European banks brought in fees of just below 30 percent of the global market. With The Federal Reserve of the United States set to raise interest rates sometime in the near future, the broad economic forecast for the United States’ economy does look brighter than the Europe’s growth trajectory. Besides the economic forces that are more or less outside of investment banks’ control, there are other factors buoying American banks profits above banks in Europe.
The European Banks bemoan financial regulations imposed by the European Central Bank. In contrast to the Federal Reserve of the United States, which was established in 1913, the European Central Bank has only been around since 1998, when it replaced the European Monetary Co-operation Fund. The Federal Reserve’s cross-Atlantic counter part has based its banking regulations on the United States’ model. Now, investment banks like Barclays, an investment bank with its headquarters in London, face a leverage ratio, which limits the amount a bank can borrow to hand out loans.
The leverage ratio is a relatively new rule for European Banks; it attempts to stem the inflated repo market, which is where a borrower sells assets for cash and promises to repurchase these securities at a later date. According to a report from Fitch, the last time discounts on repurchase agreements were at high discount levels was leading up to the financial crisis. Although current levels are not on par with these pre-crisis numbers, the repo market is too large to ignore.
According to a report from The Economist, the repo market in Europe alone is worth $6.4 trillion. It is incredibly difficult to attempt to decisively predict the next economic crisis, but the size of this market does not discredit it from being considered as a possibility for contributing to future global financial market volatility.
Clients have been turning to banks like Merrill Lynch and J.P. Morgan, which have moved on since the crisis, instead of their European competitors for many reasons. Neither European nor American banks have been enjoying pre-crisis profits due to the enhanced regulatory environment clamping down on riskier high-margin investments. While the economic prosperity of the country where a bank’s headquarters are located has some influence on the banks prosperity, in this case I believe European Banks’ decencies lie in waffling between management strategies and corporate restructuring. Although I do not have any experience in investment banking, I can’t imagine that well-thought-out and swiftly executed plans wouldn’t be an integral part of a complex and fast paced industry.-
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