I read the article but there is no insight into why. Are the US banks better run? Is the regulatory environment post-crisis better in the US? Something else?
One simple explanation is that US corporate management is generally the best in the world. American multinationals tend to outcompete European and Asian multinationals, even within their home markets. These findings are especially true when it comes to IT heavy industries, like finance.
What you'd expect is that any sufficiently globalized industry will ipso facto be dominated by American companies. Unless there's a compelling X factor that counterbalances the management differential. Like Japanese craftmanship in autos. Or the French culture of haute couture in luxury goods. But finance is sufficiently homogenous across cultures, that this probably isn't the case.
The industry has changed a lot in the last 10 years. American companies are always quicker to restructure and adapt to the new environment, where some European banks are just doing now what US banks did 10 years ago.
American people and companies embrace capital markets more, markets are much bigger and deeper. Most Americans invest a big chunk of their savings in 401k and stocks. Compare with Europe where lots more family run or state owned companies.
Close relationship with politicians. US politicians worked closely with Wall Street, many moving back and forth. Compare with Europe where politicians actively hate big banks.
Biggest Hedge funds are all based in the USA. These have been the biggest clients of IBs in recent decades.
Technology. At the end of the day capital markets are all about technology. Main tech vendors are all US based.
I can probably provide a few elements of response.
First regulations and rates. Europe is actually several major jurisdictions:
- Switzerland: they went through a near death experience during the financial crisis, with two huge banks relative to the size of the economy (UBS and Credit Suisse) that would have sunk the country if they failed. Their reaction was understandly to slash and shrink these giants to a less threatening size. UBS and Credit Suisse, once major global players and dominating asset management, are the shadow of what the once were.
- UK: of the major UK banks, two went really bad during the crisis (RBS & HBOS) while the others big banks were mostly healthy. Those two banks were requested to massively deleverage (RBS pretty much exited investment banking). The other UK banks (HSBC, Barclays) were comparably healthier. There was a wish for tough regulations within the EU, however the state of European banks is generally pretty bad (particularly in Germany and Italy) which severely limited how tough european regulations could go before threatening the stability of the country. The UK didn't have that problem and therefore gold-pleated all EU regulations, requiring higher capital ratios, higher coco triggers, strict ring-fencing, massive fines, massive PPI penalties, more severe rules and timing from UK banks. It forced them to retreat from many businesses and to shrink.
- rest of Europe. EU regulators generally are hostile to investment banking and the new regulations make many traditional IB activities uneconomical (in particular trading and financing trading transactions, as well as imposing various degree of ring-fencing of non IB activities). In addition, the EUR zone maintained low rates for a very long time (now going deeply negative), which adds further pressure on the profitability of EUR zone banks.
In the US, regulations have been less aggressive, and the rate environment (high rates) less toxic to banks (the reason why low and negative rates are toxic to banks is that 1) the bank is a net receiver of interest rate, because it has interest paying assets and liabilities, but more assets than liabilities, and 2) because if rates turn negative, it may not be able to pass on negative rates to their depositors (negative rates on current accounts) and find themselves pocketing the difference between their assets and liabilities).
However some European banks have been doing OK, like BNP Paribas or Santander. Their local regulators rather shielded them from tougher regulations. They are challenged nevertheless by the rates environment.
I think the second reason is culture. US banks took losses upfront, slashed bad activities quickly and put the problems of 2008 behind them within a few years, in a typical aggressive, pragmatic american way. The culture in Europe is often to try to live with problems and hope that waiting will make them go away. Even aggressive european players like Barclays, Deutsche Bank or SocGen were very slow to react to the new environment, and were still downsizing and cutting activities long after US banks went back into bullish/expanding mode. In Italy the banks were never really restructured.
> UK: ... It forced them to retreat from many businesses and to shrink.
The UK Banks didn't so much retreat as split their business in to a ring fenced operation (for retail), and a non ring fenced operation. The non ring fenced operations sometimes having their customer facing portion offshore in IOM, Gibralter or Channel Isles subsidiaries.
I believe one or two may have completely retreated.
Stuff like over the counter share trading which used to be available in UK Retail banks, no longer is. One has to deal directly with a stock broker operation (which could just be another company in the same bank group).
I am rather refering to commodities, illiquid rates and currency trading, certain exotic products. Also certain regions where the UK banks weren't big enough, in Asia, Africa or South America.
The ring-fencing is kind of an orthogonal question.
Thanks for the detailed reply! I suspected the US culture+regs as well. The Swiss banks being too large for the country is something I didn't realize. I guess it's a similar problem as Iceland had.
The U.S. investment banks skim the cream of the crop of students from top U.S. universities. It's sad how many of the best and brightest have gone into investment banking, but at the end of the day it does pay better so a lot go that route.
